And there are a very large number of Ivy-educated herd-followers in pink shirts and suspenders with no particularly notion of what they should do, some of whom take every opportunity to chisel out a speck of income by nefarious means.
For the most part, hedge funds get their money from government pension funds and insurance companies who manage money for the small investors. Despite the hedges' miserable performance, institutional investors will continue to invest with them. Why?
The anemic American economy simply doesn't produce enough financial returns to meet the requirements of pension plans. Most pension plans need an 8%-9% return on assets to meet their obligations. But 10-year Treasuries pay 2%, and investment-grade corporate bonds pay 3% to 4%. Equities promise higher returns, but they are volatile: a pension plan that owns stocks during a big market dip will have to sell at the bottom to meet current obligations, and may never catch up.
Because market returns undershoot the requirements of pension funds, they will come up short as obligations to pay retirees kick in. According to an American Enterprise Institute study, state and municipal pension funds are short $3 trillion. The 100 largest US corporate pension funds had a combined deficit of $326 billion last year, and are borrowing money to paper over the shortfall. If corporations come up short, they either must divert profits into pensions or, like General Motors, use the bankruptcy courts to reduce pensions.
As the American population ages during the next 20 years, the proportion of Americans over 60 years of age will jump from about 18% today to 26% in 2030. The pension problem (and the Social Security and Medicare problems only will get worse).
No one wants to admit this. To address the matter directly risks political suicide, as Governor Scott Walker of Wisconsin discovered when he took on the government unions in his state. Americans never have been asked to give back benefits that they previously were promised, and will fight bitterly to maintain them.
Never mind that there isn't enough money to fund government employee pensions, not if they confiscate the whole net worth of all the millionaires in the country. So in order to maintain the pretense, pension funds "expect" (which is to say include in their budgets) high expected returns from hedge funds.
The unions are lying to their members. Prospective pensioners are lying to themselves. Politicians (except for a very few brave individuals like Walker) are lying to their constituents. Corporate accountants are lying to their shareholders. Pension fund managers are lying to their sponsors. Hedge fund managers are lying to the pension funds.
In this circle of deceit, the least damaging form of deception comes from Wall Street, which helps a few favored hedge customers to earn the extra dollar by not-quite-legal means. "I say - is this table honest?" "Honest? As the day is long!" Everybody is lying, but only Goldman Sachs will pay a fine. It hardly seems fair.
So here are one-and-a-half cheers for Goldman Sachs. The firm serves one of the most characteristically American of all functions: to help the public believe its own bunkum. Every kid is above average in Lake Woebegone, and every hedge fund will earn excess returns, and every pension fund will beat the market, so that every prospective retiree will avoid the squeeze that confronts all of us not very far down the road.