You Can’t Beat The All Blacks, But You Can Beat Berkeley Square’s Hedge Funds

Honestly, it’s like Piccadilly Circus around here.

Actually – IT IS Piccadilly Circus around here!
You see, at The Motley Fool we’ve packed up our share-weighing equipment and our stock market dowsing sticks (just checking you’re paying attention) and moved to new offices.
We’ve travelled from our previous haunt in the new media heartland of Fitzrovia to pitch up in the old media heartland of Soho, where we’re a stone’s throw from London’s most famous roundabout.
However, of more interest to me on my lunchtime perambulations than Eros is what’s a further stroll east.
And who…

It’s hip to be in the square

Because our new office is just up the road from Berkeley Square – and hence within range of London’s ‘Hedge Fund Alley’ in Mayfair.
At one point, nearly three quarters of all hedge funds in London were based inside this posh district.
Even multi-billion pound traders like Carlyle Group and Glencore (LSE: GLEN) have operations here.
And despite high rents and a growing industry, there are still perhaps 50% of London’s hedge funds within, well, a stone’s throw of Berkeley Square’s epicentre…if you’re the revolutionary sort.
Or a two-minute ride in your black Range Rover, if you’re a high net worth individual looking for a manager for the family fortune.
In fact, this part of London probably has the densest concentration of hedge funds on the planet, given that its closest rival – Greenwich in the US state of Connecticut – is an entire town, as opposed to a London square that can be measured in terms of the number of Porches and Ferraris parked along its length.

They’re only human

I like to occasionally go to Berkeley Square to eat my lunch and observe the masters of the universe drinking takeaway coffee.
That’s right: coffee from Pret and Starbucks.
Because while there are certainly fancy bars and restaurants within a quick power walk of Hedge Fund Alley, on a weekday you’ll find branches of those chains crammed to their cookie-proffering counters with fund managers and their clients shooting the breeze.

And when I say, “shooting the breeze”, I mean deep in conversation about the markets, potential investments or – and I’ve overheard this more than once – their fees.
Of course, I do realise that hedge fund managers are just normal people like you and me.
(Well, as normal as you can be when you bathe in unicorn milk and earn seven figures in a bad year.)
But it’s still surprising to see them dithering like me over a healthy roasted vegetable wrap versus the salt beef and salami bagel.
And it tickles me as pink as that salt beef to see this supposedly secretive industry taking a break with the same ubiquitous brews as the rest of us.
Which brings me to the other reason I like to pop to Berkeley Square.

High rents, low returns

A confession: I’m not really a hedge fund groupie.
On the contrary, while I admire their smarts and I guess I’m jealous of their pay packages, I’ve noticed over the past few years that the returns they put up are distinctly dull, especially after their big fees.
For example, one study found that the HFRX Global Hedge Fund Index has failed to beat a standard 60/40 benchmark of 60% US shares and 40% US bonds over the past decade.
And a 60/40 portfolio, let’s not forget, is something you can set up for yourself using ETFs for about the price of a slap up meal for two in Pret.
That’s in sharp contrast to the huge hurdles and high charges of putting money to work with a hedge fund.
In fact, as I’ve read more reports of how hedge funds have failed to live up to their promise, I’ve half expected to see more of these titans nervously twitching when I’ve gone manager spotting in Mayfair.
Because what if their clients find out they’re not really all that?

Well, fear not. This year saw total Assets under Management parked with the global hedge fund industry hit $2.2 trillion.
That’s an all-time high, despite their humdrum performance.

A sporting chance

Of course, if the super-rich want to waste their money investing in hedge funds, that’s their business.
But I subscribe to the ‘If you can’t join them, beat them’ school of thought.
It truly amuses me to wander around Berkeley Square in jeans and a funny t-shirt, knowing my returns over the past few years may well be better than the polished money mogul who just marched by.
Indeed, in what other field can you challenge the professionals on a level playing field, and directly compare your performance to theirs?
It would require years of training to take on Usain Bolt in the 100m, if you were mad enough to try.
Alternatively you might think you can swerve a ball from the penalty spot better than Beckham – but no football team is going to give you the chance.
Or maybe you believe you’d have made a better fist of coaching England through the World Cup than Stuart Lancaster? (After all, nearly everyone does, from what I’ve read.)
Well, dream on.
The closest you’ll probably get to handling pressure at the top of sports is in the last week of your Fantasy Football League.
But investing is different.

Have you got edge?

Set-up an online broking account, inject some savings, and – in theory – you’re on an equal playing field with pros considered at the top of the game.
That’s not to say it will be easy beating them.
Quite the opposite!
There are several reasons why hedge funds are doing worse than in their glory years, but one is sheer competition.
The smooth operators I see sauntering in and out of Starbucks aren’t outsiders any more – they’re among the smartest financial brains in the business, and they’re all running billions in funds, and trying to do it better than the next super-smart guy.
What’s more, these managers have teams with huge incentives, vast budgets, and access to data and technology you can only dream of.
Yet if you can beat a balanced 60/40 portfolio over ten years – perhaps through Foolish tenets like focusing on the business and investing for the long term – then you can beat the average hedgie.

Remarkable… and well worth thinking about when you’re next wandering through Mayfair!

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