When you picture the world’s most successful investors, chances are you imagine an Ivy League-educated hedge fund manager with algorithms and a stable of analysts at their disposal.

But over the past two decades, the average hedge fund has underperformed the S&P 500, while many ordinary Americans have quietly built wealth with simple but consistent strategies. Understanding what’s behind this counterintuitive reality could change the way you invest forever.

Limitations of Professional Investors

Pressure to Perform

Professional investors, especially those managing hedge funds, are always under intense pressure to consistently deliver strong results over short timeframes. Brief periods of underperformance can lead to significant outflows of capital and a diminished reputation, forcing managers to focus on short-term gains rather than long-term strategies.

But beating “the market” consistently is extremely difficult—Warren Buffett says buy the S&P 500—and the pressure to do so will generally backfire, prompting money managers to take on additional risk rather than merely let the market work for them over time. This is usually a losing strategy in the long run.

Conformity and Herd Behavior

Another challenge for professional investors is the tendency to follow the crowd. In finance, herd behavior means making decisions based on what others are doing. This is common because managers want to avoid standing out by making mistakes others didn’t make, and therefore underperform the competition. Research shows that hedge funds often make similar trades as their peers, partly because of close industry networks and a desire to protect their reputation. This is not a rational approach to building wealth. It can make professional investors slow to react to changing market conditions if others aren’t doing the same.  

Overconfidence and Risk

Professional investors, especially those with elite educations, are often prone to overestimating their skill at predicting market movements. This overconfidence can be fueled by short-term past successes, advanced training, or the belief that their sense of expertise gives them a unique edge.

In practice, overconfident investors tend to take on more risk. They may trade more frequently, make larger bets, or concentrate their investments in a few high-risk assets, believing they can outsmart the market. This can lead to higher costs, less diversification, and greater exposure to losses. Overconfident managers are more likely to ignore warning signs or dismiss information that contradicts their views, which can further amplify risk.

Recent research also finds that hedge fund managers are especially likely to increase risk-taking after periods of underperformance, hoping to quickly recover losses and prove their skill. This behavior can make professional investors more vulnerable to market downturns and sudden shocks, ultimately harming long-term returns.

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Advantages of the Average Investor

Flexibility and Independence

 Without the constraints of strict institutional rules or client mandates, individual investors can make independent decisions based on their own goals and risk tolerance. This freedom allows them to adjust their investment strategies quickly and take advantage of new opportunities as they arise. Research shows that financial flexibility is especially valuable for smaller, independent players who are not bound by rigid structures.

Long-Term Perspective

Average investors can focus on the bigger picture instead of quarterly results. They are free to stick with their investments for years. Recent insights highlight that the smartest move for most investors in 2025 is to stay invested for the long term, ignoring short-term market noise and volatility. This patience and focus on long-term gains can lead to better outcomes.

Case Study and Example

Warren Buffett’s Bet Against Hedge Funds

Warren Buffett has long argued that the average investor should put their money in an S&P 500 exchange-traded index fund with low fees and let compounding do the work. In 2008, Buffett wagered $1 million that a simple, low-cost S&P 500 index fund would outperform a group of hedge funds chosen by professional managers over 10 years. He won. His chosen index fund returned 7.1% per year, while the hedge funds managed just 2.2% per year after fees. This showed that an average investor, simply investing in a broad market index, could beat highly paid professionals over the long term.

Bottom Line

Despite having access to advanced resources, professional investors face limitations, the most significant of which is probably the difficulty in beating the market on a regular basis. Conversely, individual investors possess distinct advantages: unrestricted flexibility, complete independence, and the ability to prioritize long-term wealth creation without institutional constraints.