Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

Anthony Scaramucci, the Wall Street carnival barker recently turned White House communications chief and even more suddenly ex-communications chief, had a tough sell, pitching an erratic president who is disliked by a large segment of the U.S. population and increasingly viewed as failing. Faith, at least on Wall Street, that Trump will be able to deliver on his economic campaign promises is waning.

Scaramucci's earlier training seemed as if it might serve him well. Back on Wall Street, Scaramucci was the successful pitchman for one of the worst investment products ever created -- a hedge fund made up of other hedge funds. It's a product that is a twofer of terribleness, some of the worst performance mixed with the highest fees, though those are not unconnected.

Hedge funds on their own haven't done all that well as of late; they are on a multiyear stretch of underperformance. So it probably isn't a surprise that hedge funds that invest solely in other hedge funds wouldn't do much better. Nonetheless, it's hard to find another investment product that has done worse. Subprime mortgage bonds, perhaps, but then hedge fund of funds.

Poor Performer
Hedge funds that invest solely in other hedge funds have trailed just about everything else
Source: HFR, Morningstar, Bloomberg

According to HFR, which tracks all hedge funds, the average hedge fund of funds has returned just 4.6 percent annually over the past two decades. The stock market is up 7.6 percent in the same time. Investing directly in hedge funds would have returned 6.6 percent a year. The average mutual fund has risen 6.4 percent a year. Even 10-year Treasury bonds are up 5.3 percent. And that's an investment that is supposed to carry little or no risk.

Scaramucci, and others who have sold hedge funds of funds, on the other hand, have done very well. Scaramucci's recently released financial disclosure form shows he made as much as $10.9 million in income from Skybridge Capital, his former hedge fund firm, in 2016 and the first half of 2017. His wife, who filed for divorce last week, also made more than $250,000 in salary from the firm as an investor relations executive. Scaramucci's investors, on the other hand, lost money last year. One of Skybridge's oldest funds, Series G, fell 0.8 percent in 2016. The S&P 500 was up nearly 12 percent.

The most common reason given for the underperformance of hedge funds of funds is the fees. The funds typically charge as much as 2 percent a year in management fees on top of the 2 percent management and 20 performance fees that are typically charged by the hedge funds themselves. That's nearly exactly the gap in performance between hedge funds and hedge funds of funds over the past two decades. Skybridge charges an average 1.25 percent management fee on all its products (the G Fund charges 1.5 percent), and an official at the firm says it actively pushes the funds it invests in for fee breaks. Proponents of hedge funds of funds say what has drawn investors (though fewer lately) is volatility that is much reduced from investing in the market or hedge funds directly, which is what diversification is supposed to do. The standard deviation of the performance of the average hedge fund of funds is roughly half the S&P 500.

Stalled Out
Investments in hedge funds of funds peaked a decade ago
Source: Bloomberg
* through March 31

And Skybridge's longer term track record has been better than its peers. Soon after the financial crisis, the firm pivoted into credit funds that scooped up mortgage bonds and other toxic assets at a discount and made big returns in the rebound. It jumped into activist hedge funds a few years later, just as those funds got hot. Skybridge's assets under management have nearly tripled since Scaramucci bought the fund of funds group from Citigroup in 2010. The Skybridge G fund, according to a document from the firm, was up an annualized 6 percent in the 10 years ended in mid-February. That nearly quadrupled the 1.25 percent that the average hedge fund of funds returned annually in the same time.

Of course, to trumpet success, Scaramucci picked a very low bar to jump. He may need to hold on to that skill in whatever comes next.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Stephen Gandel in New York at

To contact the editor responsible for this story:
Daniel Niemi at