No one’s incentivized to sell investors what they really need, says ex-hedge fund manager turned author Lars Kroijer.
[This article previously appeared on our sister site, IndexUniverse.eu.]
Hedge funds and index trackers are polar opposites: the highest- and lowest-fee ends of the investment product scale.
And yet a surprising number of hedge funders are fans of indexing. Reportedly, many are closet admirers, buying ETFs and index funds for their own portfolios—as though stepping out of a Ferrari and into a well-used family diesel when away from the public gaze.
Others have switched career to embrace tracker funds. Alan Miller, manager of a fund of ETFs at SCM Private, was once a hedge fund investor at New Star. Victor Haghani, partner at Long Term Capital Management in the 1990s, now looks after a $200 million portfolio of index funds and ETFs, Elm Partners.
Lars Kroijer, who ran an equity hedge fund, Holte Capital, between 2002 and 2008, is another convert. But the Dane no longer manages client money himself (though he sits on several fund boards). Instead, he’s turned author.
Following a well-received account of his hedge fund experiences (“Confessions of a Hedge Fund Manager”), published three years ago, Kroijer has written a new book, “Investing Demystified”, with the objective of explaining why index investing is the rational approach for almost all of us.
Kroijer’s book is serious but accessible, combining investment theory with practical advice on how to construct a rational portfolio. His book also covers financial planning, pensions and insurance and how and when to ask for specialist help.
The author says he wants to help the rest of us to manage our money without losing a fortune to intermediaries. “Your life savings are not a spectator sport,” he told me recently in London.
We should all face a simple truth, Kroijer argues: that we don’t have an “edge” in financial markets, and we should select cheaper, indexed investment products instead. His book is written “for my Mum, and for Mr. and Mrs. Smith,” Kroijer says.
“It’s very unlikely that you have the ability to beat the market,” he explains. “And once you admit that you don’t have an edge, you can move on from the conventional wisdom of buying expensive, active products that imply skill in investing. You don’t need to pay more for something that isn’t better.”
The Dane is aware of the irony inherent in his new role.
“A one-time hedge fund manager writing a book about investments without edge may seem like a priest writing the guide to atheism,” he writes in the introductory section of his book.
The theme of faith recurs during our conversation. At one point Kroijer says, “I’m religious about this stuff. If you keep fees down you can do extremely well.”
But Kroijer is self-deprecating and doesn’t come across as the type of indexing evangelist one might meet at a US fund conference. All the same, his tone intrigues me. I ask him if he ever reached a point where he lost belief in the hedge fund model.
His reasons for closing his hedge fund and returning money to investors were personal, Kroijer responds. But he adds that he doesn’t regard his past professional life and the theme of his current book as contradictory.
“I’m not anti-hedge funds and active management,” he says. “Some people do have edge. But the onus is on people who want to give money to active managers to prove that the managers have skill. And having an edge is a full-time occupation.”
If you want to place bets on individual companies, Kroijer says, at the very least you should recognise who you’re up against.