How has Charlie Munger's investment stance on hedge funds and actively managed funds evolved?

Charlie Munger's Changing Views on Hedge Funds and Active Funds

Hey, that's a pretty interesting question you've got there. I follow Munger's investment insights quite closely myself—after all, he's partnered with Buffett for decades, and his words always offer valuable lessons. Munger is a pragmatic thinker when it comes to investing, and his stance on hedge funds and active funds has indeed evolved. Let me break it down for you in a casual chat-style sharing session. We’ll take it step by step—no rush.

First, What Are Hedge Funds and Active Funds?

Simply put, hedge funds are sophisticated investment vehicles where managers use complex strategies (like short-selling or leverage) to chase big returns, but they come with sky-high fees—typically the "two and twenty" model: a 2% annual management fee plus 20% of profits. Active funds, on the other hand, involve managers actively picking stocks or bonds to outperform the market average rather than tracking an index.

Munger wasn’t overly critical of these early on, but his views shifted over time, growing increasingly skeptical. Why? Let’s trace the evolution.

Early Stance: Mild Involvement, No Enthusiasm

In his younger days (say, the 1960s–70s), Munger worked as an investment manager himself, running several funds. Back then, he embraced active investing, believing disciplined research could uncover profitable opportunities. He and Buffett even used active stock-picking strategies early at Berkshire Hathaway, buying companies like Coca-Cola for long-term holds.

As for hedge funds, Munger never dove in deeply. During his era, they were just emerging, and he likely saw merit in some strategies—like hedging to reduce risk. Overall, though, he wasn’t a blind advocate. His early stance was neutral-to-positive: if the manager was sharp, it could work.

Later Shift: Growing Criticism, Embracing Passive Investing

In his later years—especially the past 20–30 years—Munger’s attitude flipped. He publicly criticized hedge funds and most active funds, calling them "rip-offs." What drove the change? Data and experience.

• Views on Hedge Funds: Munger declared the entire hedge fund industry a "joke." He argued their fees were unjustified, as most underperformed the market (e.g., the S&P 500). He noted many made modest gains in bull markets but crashed in bear markets, lagging behind low-cost index funds. He even quipped that the "two and twenty" model was like a casino’s cut—investors lose long-term. Today, he strongly advises average investors to avoid them unless they’re ultra-wealthy and well-informed.

• Views on Active Funds: Similarly, Munger grew convinced most active managers can’t consistently beat the market. Why? Markets are efficient, information is transparent, competition is fierce, and high fees erode returns. He and Buffett now champion passive index funds (like broad-market ETFs) for their low costs and steady long-term gains. Munger famously put it: "If you’re not a genius, don’t pretend to be one. Just ride the market."

This shift stemmed from Munger’s longevity (he’s nearly 100), having witnessed countless market cycles and manager meltdowns. He moved from believing in "smart stock-picking" to "simplicity is best," arguing that avoiding complexity and fees is core to investing wisdom.

Why Should Ordinary Investors Care?

If you’re a regular investor like me, Munger’s evolution teaches a key lesson: don’t fall for flashy fund pitches. While he once saw potential in active investing, experience proved passive strategies are more reliable long-term. As Munger himself says, 99% of people should buy index funds, hold patiently, and avoid tinkering.

Of course, this isn’t absolute—Munger and Buffett remain active investors because they’re experts. But for most of us, his advice is clear: keep it simple, low-cost, and long-term. For deeper insights, I’d recommend his book Poor Charlie’s Almanack—his speeches there are refreshingly down-to-earth.

Got more questions? Just ask—I’m happy to share!