GUEST COMMENT: Long only asset managers are mostly of inferior intelligence and add very little value

Forget bashing hedge funds because of their high fees. Long-only fund managers are the ones who are ripping us off. Their performance is disappointing. This is unsurprising: most long-only managers are remarkably stupid. Unlike hedge funds, the industry is dominated by well-connected by not necessarily astute public schoolboys.

Naturally, there are exceptions. There's the minority of hedge fund wide boys who punt friends-and-family money from a tiny office in Clerkenwell. There's also the small minority of long-only managers who are genuinely good at what they do and who consistently deliver good returns.

However, most long-only managers are too scared, or too stupid, or both, to deviate from the stock and sector weightings of the major stock and bond indices. We should all worry about the large amounts of our capital that they manage.

Hedge fund fee structures incentivise them to look for alpha. This makes hedge funds exciting and interesting places to work. The people there are genuinely intellectually interested in their investments.

By contrast, long-only fund managers aren't rewarded for taking genuine investment risk. They're rewarded for sticking with the herd.

My Tarquin experience

Personally, I once had a near miss with one of these funds. Scared I'd never find a job, I punted my CV to a fund manager at one of the big names in institutional investment. Let's call him Tarquin. I called to follow up. He was friendly and made time to chat to me. However, it quickly became clear that he wasn't too bright.

As I attempted to make a stock pitch to him, I overheard a lot of weird background noises (loosening his belt after a good long lunch, almost falling over backwards in his chair in the process, shooing his PA and later his jolly jape-loving colleagues out of his office). It was all I needed to know. I thanked him for his time and never followed up.

The simple fact is that hedge funds and other more aggressive asset classes wouldn't exist if asset managers didn't consistently underperform over time.

Hedge funds may be expensive but they offer better performance: even if they lost money after Lehman imploded they were down 20% versus roughly 40% for long only. Unsurprisingly, the FTSE, S&P 500 and other main indices lost roughly the same amount.

The worst thing about "closet index huggers" is that they are forced to buy more at the top of the markets, when asset prices are most choppy, and sell at the troughs where value is to be found. This keeps their portfolios weighted towards the indices. It's the opposite of the adage "buy low and sell high".

I accept that hedge funds still didn't deliver the vaunted "absolute returns" that they promised, but no-one else in the market did either. The sooner we stop expecting to always make money in all markets the better. Some capital loss was inevitable: many asset allocators have to stay constantly invested and were prevented from going to cash by their mandates. Those who can do liquidate are generally too scared to for fear of missing the return of a bull market, or because the transaction costs are prohibitively high.

Until this incentive to stay invested despite poor performance is fixed, Tarquin and his colleagues are sitting pretty. However, they are neither perceptive nor deserving of their pay.

The author is a former corporate financier who once escaped to the world of private equity.