How do fund managers make money?

Why don't the S&P 500 committee set up a hedge fund of their own and make tons of money for themselves?

• Given that S&P500 has a track record of beating most hedge fund managers, why don't the committee set up a fund of their own and make tons of money for themselves instead of letting index funds/ETFs ride on their stock picks?

• Answer:

  This question is confusing a couple of things.  Let's try to clear this up. Hedge funds don't necessarily underperform S&P 500.  Also, that's not the appropriate benchmark for hedge funds and other alternatives that can have a broader set of investments.  It is an appropriate benchmark for mutual funds, however, and there is literature suggesting that mutual funds don't consistently beat the benchmark. There isn't anything magical about how the S&P in particular is constructed that makes it a unique benchmark and one that should be replicated if you want to run a passive, long-only fund.  Also the rules for how it is constructed are public.  So, statements about how certain investments, mostly mutual funds, don't beat the S&P aren't statements about how great the S&P is, they are more statements about how those investments are inefficient because they charge fees, yet still don't beat a passive benchmark.  That doesn't mean that investors will pay a high fee to replicate a benchmark that is public and they can replicate themselves. There are funds and investment vehicles that do follow similar strategies to constructing a passive index like S&P 500, but those funds charge much lower fees.