HEDGE FUNDS….I really don’t get hedge funds. Their reported performance is only a bit higher than most stock market indexes, and there’s very persuasive evidence that even the reported performance is overstated — possibly by a lot. So why are people willing to pay fees of 20% or more to hedge fund managers? What am I missing?

Take this story in the New York Times, for example. The top hedge fund manager in the world posted a gross return of 84% last year using rocket science algorithms of various kinds, so it’s easy to understand why his customers were happy to pay him astronomical fees. But there’s also this:

Raymond T. Dalio, head of Bridgewater Associates, which has more than $30 billion in hedge fund assets, for example, took home $350 million last year even though his flagship Pure Alpha Strategy fund posted a net return of just 3.4 percent for the second consecutive year.

Why would anyone in their right mind keep their money in this fund? More to the point, how has Dalio avoided angry mobs of customers threatening to do things that even John Yoo wouldn’t approve of unless he gives back a piece of that $350 million? ($350 millon!)

Beats me. But at least I’m not the only one who’s confused:

“There is some question as to what the hell they are doing that is worth” that kind of money, said J. Bradford DeLong, an economist at the University of California, Berkeley. “The answer is damned mysterious.”

Anyone care to enlighten us?

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