🚀How This One Index Managed To Beat Nearly Every Single Hedge Fund In 2021

When it comes to investing, it’s best to leave your holdings mostly alone so that they can truly compound and reap those massive rewards that only come about through time, enabling you to get that juicy growth on top of growth. This is what we want, rather than forever fiddling with our investments cause as we know, selling at the wrong time (ahem, March 2020) can cause massive problems for us and our portfolio. Probably in that order! And the very same goes with buying at the wrong time (like at the top of a market). 

But since none of us can actually time markets as they’re uber-efficien so as soon as news hits the world, it’s already priced it. Now, unless you’ve got super super-cool software that operates at the speed of lightning that you aren’t telling me about(!) you’d have bought when things already went up or sold when things already went down. Slightly less than ideal. And voila, you’d have already missed out on the timing. So, unless you know the future or can predict the future, which I certainly can’t (though here are some things you might wanna watch out for this year) then you can say goodbye to trying to time the market. It ain’t worth it! 

The whole lot 

And that’s exactly where passive investing comes in handy. By owning the entire market (for ex the FTSE or the S&P) rather than selecting a few stocks you think will outperform (active strategy) you don’t have to worry about trying to time anything. You’re just getting the average of a particular market. 

Photo by Jorge Martínez on Unsplash.com

But here’s the thing about indexes. Only 1-2% of its constituents will be the real winners. The Amazon’s and Microsoft’s of the world. And it’s these few companies, not the majority, that end up dominating returns. So why not just own the whole basket instead of rummaging through hundreds of thousands of baskets trying to find that lone gem.

And what usually happens when you own a market, your returns will be average. The average of the market. Okay, that makes sense. And usually, you can expect other things (ahem, hedge funds) to beat these boring old things. Makes sense again. But something really strange happened this year. The market recovery post-March was so immense that this plain old vanilla index (the S&P 500) shot up by 29%! And hedge funds just couldn’t compete with these kinds of returns. Not this year. This year, all but three failed and fell flat on their expensive faces. Let’s dig in to find out what happened in this spectacular year where this S&P 500 had its time in the sun. 

What’s the deal with hedge funds? 

The rich have money at their disposal. And money that can help them get more money. (If invested wisely). So say hello to hedge funds. The way the rich (as well as institutional investors) invest. Hedge funds are a funny sort of contraption. And their name is rather misleading to what they’re actually focused on doing – and paid to do. To ‘hedge’ is to reduce exposure, remove some (if not all) of the risk associated with a particular trade. But what hedge funds are most focused on doing is actually taking on more risk (known as speculation) to try and beat the market. Cause as we all know more risk (should usually) mean more return. But not in 2021! Read on. 

Photo by Brian McGowan on Unsplash.com

So, hedge funds are essentially investment funds for the super-rich. They manage money for their wealthy clients and are actively managed rather than passive (like index-trackers and so on). I guess if these wealthy folk are paying sky-high fees, you’d expect them to be as active as possible cause anyone (you and I) can have access to passive funds. That requires zero effort. Not quite exclusive but it does the job. And this year, boy did it do the job!

Oh, and one more thing: it’s just anyone who can invest in these funds. In the US, the minimum requirement for investment is one million bucks! So, this means it’s ultra-expensive and therefore, ultra-exclusive. But this year, not only did most hedge funds fail to outperform the S&P but they also failed to track its return. With all but three returning more than the S&P. Index-investing ain’t so dull after all, huh! I think it’s safe to say that even with all the money in the world, sometimes it just pays to not pay, if you get what I mean! To sit back, own your stocks, and do nothing. Because had all those wealthy clients ditched their fancy hedge funds for a boring old index (the S&P), they’d have outperformed their friends. 

In life, we’re always on the lookout for ways of making money. Quickly. But look at what kind of returns can be made by sitting still and hanging on. For the long-haul. 2021 was a whopper year when it came to returns and this year we might not be as fortunate. But the game is still the same. Invest, over a long, long time, resisting the urge to cash in early or buy/sell at silly times. Often on emotion. Sitting still and doing nothing is often way harder than acting. Compounding is the most wonderful machine and it’s what stands between where you are now to where you want to be. Investing = Time + Money. That’s it. That’s all it is. And it’s the time bit that you truly want to maximise. Time will allow your money to grow, and grow, and grow. Till one day you can’t believe your eyes at how much your initial investment has grown by. Have patience and stick with it. 

You can take some comfort in the fact that your portfolio (during 2021 at least) has probably beaten most hedge funds! Apart from three. I call that a big win! Though, past performance is not indicative of future performance. So don’t get complacent because we’re living through unchartered territories. 

In this very instance, it paid to own the entire (S&P) basket rather than get going with derivatives and other expensive products that hedge funds are renowned for. But, while index-investing certainly has its merits, particularly during bull markets, it’s during those nasty bear markets where active might very well outperform. As ever, diversify. Not only your holdings but your investment style too. 

Be prepared for anything. Because the impossible has a funny way of cropping up. 

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.