And, regarding being skeptical of things like "hedging risks" and "complex portfolios," I don't know. I'm just not sure enough hedge funds really do a great job handling tail risks to not be skeptical of all of them as a group. And, surely sophisticated investors can target specific sectors and build arbitrarily complex portfolios (if they're into that sort of thing) with passive things like ETFs for much lower fees on their own.
I'm not talking about all hedge funds managing tail risk for their own portfolios, but funds which are designed to do nothing but hedge against tail risk. They provide a valuable service, and a small allocation to such a fund in concert with a large holding in the S&P500 will often outperform the S&P500, even if the fund itself loses money.
This isn't clear to me. To me it seems rather that this is a bet against hedge funds. I can see a way to your interpretation but it does not seem as likely to me.
Quoting the shareholder's letter from 2016 [1], the actual bet was "that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. [...] For Protégé Partners’ side of our ten-year bet, Ted picked five funds-of-funds whose results were to be averaged and compared against my Vanguard S&P index fund."
Do tail-risk-targeting hedge funds have a better incentive than 2-and-20? Honest question, I have no idea. I assume 2-and-20 drives shooting for the moon and closing the fund if it doesn’t work out.
> * It's reasonable to be skeptical about any fund having a goal that's anything other then maximizing long-term returns.
I really don't think it is. If I'm a sophisticated investor, I may want to invest in funds which hedge against tail-risk, or provide broad exposure to some specific sector, etc. Neither of these things are about maximising returns relative to the S&P500. There are strategies with negative expected returns in the long-run, but when added to a portfolio can improve its returns. Portfolio construction can get very complex.