I spoke to a couple of hedge fund friends of mine re: the question of why can’t the hedge funds replicate similar returns. The hedging/risk management answer offered by some others above is only a small part of the true reason for this phenomenon. The real and primary reason is that these strategies don’t scale from a market liquidity perspective when you are trying to deploy truly large sums of money (hundreds of millions of dollars or more). This seems counterintuitive at first. But consider this example.
Let’s take Alteryx, a company with a 1.8 billion market cap, and a sizable chunk of your portfolio. Let’s say the stock costs $50. If you are a small individual investor with a portfolio of a few hundred thousand to a few million dollars, you are likely buying hundreds or maybe a few thousand shares of this stock at a time. That’s peanuts to the market - the liquidity is sufficient to support your transaction without moving the price. But if you are trying to buy something like a $100,000,000 worth of Alteryx, it’s a very different story. You are buying something like 5% of the entire company in one fell swoop. You can’t actually go into your TD Ameritrade account and make that trade for 7 bucks. Go take a look at the Level II quotes for Alterix right now. You’ll see that even with a trade of just a few thousand shares, you’ll basically fill the first 10 levels of the book. Start going beyond that and you are going to start getting filled at ridiculous prices as you start moving the market. Now you are no longer buying at $50, you are buying at $55, $60, $70 and beyond. Your trade is ruined. You don’t want that.
So what do you do? Well, you engage dealers (or your broker does on your behalf). Dealers will take your $100,000,000 request and try to find sellers for you without moving the market too much. They will have to spread the trade into many pieces over many days. They will call other dealers and see if others are looking to sell and try to make private deals for chunks of your big trade. Moreover, if they are trading on exchanges, they’ll need to worry about all the algorithmic trading that’s been unleashed in the market - computers trying to detect big deployments of money and trade into them. So they will need to be extra careful in deploying your money. Instead of buy, buy, buy, your trade will look more like buy, sell a little less, buy a little more, etc. etc. Your big trade will turn into hundreds or thousands of little trades in the attempt to keep the pricing at least somewhat reasonable. Of course, each dealer needs to eat. So they will do all this for a fee - something like 1 to 2 percent. Now the bigger the trade the more dealers will need to work on it, because there is now human interaction involved, and that does not scale very well. And each dealer involved will take their fee.
Now imagine that you are not trying to deploy a measly $100m, but you are actually large hedge fund with pension funds as you clients, trying to place billions of dollars at reasonable prices. You will need a small army of dealers now. Each charging a fee for their work. By the time you are done deploying that much money into the market, you’ll be pretty lucky (and pretty happy!) with a 10% return after all the fees. And you will also need to have a much larger portfolio, because unless you are planning to buy up small companies whole, you can’t spread that much money over 10 small cap stocks like you have.
Now add actual hedging and risk management concepts on top of that equation and I think you’ll have a complete answer to your question.
Turns out having too much money actually IS a hard problem.