What's the point of a hedge fund if they can't "beat" the market?
Shouldn't they just invest in SPY?
People give hedge funds money
According to statista.com research, assets under management by hedge funds worldwide in 2023 (last year) were around 5 trillion dollars (1).
That said, it would seem, and has been widely reported, that most/all hedge funds can't beat the market.
So how has 5 trillion dollars worth of money been allocated to hedge funds?
Are all these people wrong?
Buy an index fund (SPY) and hold it
Shouldn't these hedge funds (or those who gave them the money) be better off buying SPDR S&P 500 ETF SPY and holding it?
If you can't beat the market, why not join it?
They aren't doing what you think they are doing.
The point of many of these hedge funds is to generate returns that are uncorrelated with the market.
So it's not that they are trying to beat the SP & 500; it's that they're trying to beat holding cash in a risk-free rate product (treasury bills, etc).
Though they may not reach a zero correlation with the market, the goal is to be as close as possible, given cost and diversification constraints.
What's the point of a hedge fund if it can't "beat" the market?
The point is to do portfolio allocation so that an asset manager can assemble various pieces as best as possible to be uncorrelated and provide a better return than holding cash in a risk-free rate product.
This gives you better risk-adjusted returns from investing in different hedge funds than on their own. As long as they are not highly correlated to each other, taking a weighted combination of them can lower the overall portfolio risk.
Sources:
(1) https://www.statista.com/statistics/271771/assets-of-the-hedge-funds-worldwide/