Home   Corporate Philosophy   ROI Management Team   Investor Participation
  Strategy Overview   Fund Performance
  About Hedge Funds   Approach to Risk   Comparison to Mutual Funds
  Investor Relations   Submit Request


Comparison to Mutual Funds

Traditional Money Management is based on Modern Portfolio Theory (MPT), with a goal of relative market performance. MPT’s premise is that markets are efficient, and that consistently beating the market over time is impossible without inordinate risk to capital. Traditional money management (Mutual Funds) is also characterized by a fee structure based on the amount of assets under management.

By contrast, the Lookout Mountain Report notes: non-traditional money management (Hedge Funds) is not a subset of traditional money management, but rather a separate discipline based on the antithesis of MPT. It presumes that markets are saturated with inefficiencies that, in turn, can create significant opportunity for superior returns – without increased risk to capital. The principal goal of non-traditional money management is absolute returns, and fees are usually weighted towards performance. Another significant difference is that the non-traditional money manager generally has a significant portion of his personal assets at risk alongside his client’s assets.

"Hedge Funds aren’t straitjacketed by regulatory constraints and public relations requirements that can hobble mutual fund managers."

The most important point for investors to understand is that hedge funds are fundamentally different from traditional money management firms. It’s not just that hedge fund managers use different strategies and methods; they operate with a completely different mind-set. And the contrasts are dramatic!

The Crucial Differences

  • Strive to achieve high absolute returns. Hedge fund managers have both the motivation and the freedom to achieve that goal. This is almost the polar opposite of traditional managers who use prescribed tools and techniques to pursue a relative performance, beat-the-market objective.

  • Reject the notion that securities markets are highly efficient. Hedge fund managers do not accept the idea that achieving a small incremental return over the market averages is the best one can hope to do. Rather, they believe the market offers abundant opportunities for creating wealth by perceiving what others do not.

  • Have a different attitude toward risk. Traditional managers get paid to invest with the mainstream, trying to avoid risk while participating in the long-term growth of the market. But hedge fund managers don’t necessarily see risk as the enemy. Rather than trying to avoid risk, they work to manage it and even turn it to their advantage. In fact, the ability to take calculated risks on pockets of opportunity allows them to have the potential to earn superior returns.

  • Succeed by achieving outstanding returns. Hedge fund managers get most of their financial rewards from performance fees and returns on their own personal investments in the funds they manage. In the traditional money management system, fees are driven by the amount of assets under management, regardless of performance. As Goldman Sachs put it in a 1995 report, The Continuing Evolution of the Mutual Fund Industry, "Managing money is not the true business of the money management industry. Rather, it is gathering and retaining assets."

  • Use a flexible, opportunistic investment style. Traditional managers must maintain rigidly defined style disciplines at the insistence of institutional clients and consultants. To meet their absolute return objectives, hedge fund managers constantly adapt their strategies to the shifting realities of the marketplace.

  • Focus on avoiding losses above all. To a traditional manager, the biggest worry is “benchmark risk” – that is, underperforming his or her benchmark. The primary focus of hedge fund managers is not to lose money. Below is a great example of this mindset.

Hedge Funds Outperform Mutual Funds in Falling Equity Markets



During the last 14.5 years, the S&P 500 Index has had 14 negative quarters, totaling a negative return of 90.8%. During those negative quarters, the average U.S. equity mutual fund had a total negative return of 95.2%, while the average hedge fund had a total negative return of only 5.6%, displaying the ability of hedge funds to preserve capital in falling equity markets.

 About Hedge Funds
 Approach to Risk
 Comparison to Mutual Funds