A lot of people on FinTwit are once again trashing hedge funds and their 2/20 model because these funds failed to beat the SPX.
This smacks of recency bias. Yes, the SPX has a great long-term track record but you couldn't invest in the index directly until Vanguard launched their first index fund in 1976.
There were long periods when the S&P 500 had zero returns over a soul crushing duration. Stock for the long run is a fine concept, but would any rational investor stick to a strategy that spends a decade plus in a drawdown?
That's where hedge funds come in. You want to limit drawdowns? That comes at a cost - the cost of underperforming the index in great years. 2/20 is not for beating the index - it is for producing alpha without being overly correlated to the index.
It is also for diversification. If you work in a Mag 7 company, your RSU/DSUs in company stock account for a big part of your net worth, and you have your retirement account fully invested in US equities, you have zero diversification. The stock plummets, the company lays off employees, the economy turns, and suddenly generational wealth becomes supermarket money.
This is not a hypothetical scenario. Cisco employees in 2001, Lehman employees in 2008, even CEOs who took loans against equity to avoid capital gains taxes have experienced this firsthand.
Some risks are simply not worth taking. Uncorrelated alpha mitigates this risk. That's what the 2/20 is for.
Outperforming the index is just gravy on top.
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Good Trading!
Kashyap