One former Wall Street hedge fund executive has just published a book in which he claims that investors would have done twice as well as hedge fund investors by investing in U.S. Treasuries over the past decade. Twice as well. Simon Lack, whose book is titled “Hedge Fund Mirage,” is a former hedge fund executive at JPMorgan Chase & Co. He now runs SL Advisors in Westfield, N.J.
Lack says that swooning investors have created an unwarranted hedge fund hero myth that allows managers to get away with charging outlandish fees and expenses for an opaque investment that delivers sub-Treasury level performance with extremely high risk.
“Institutions say their goal when investing in hedge funds is an annual return of 7%, which means that the industry would have to generate $140 billion a year in returns. That would exceed anything they have ever produced,” Lack observed. (“Hedge fund insider spills the beans: You’re better off with Treasuries,” InvestmentNews). “Nobody in the hedge fund business has disputed my point about poor performance,” he was quoted as saying.
Lack’s research showed that hedge funds’ returns shrank as the industry’s asset base grew. “[Wh]en the money started flowing in ‘ returns got progressively worse,” he added. Today, hedge funds hold $2 trillion in assets.
Lack says that most of the hedge fund returns have gone to the hedge fund managers themselves ? lending credence to Warren Buffet’s description of them as “manager compensation schemes.”
The typical hedge fund charges a flat 2% fee on assets and 20% of profits.
“Overall, results are poor, but there are superior hedge fund managers out there,” Mr. Lack was quoted as saying. “[Advisors] should do what they did in the old days ? be selective about the few managers they choose, look for consistent top-performers who can deliver absolute returns, and negotiate fees.”
Page Perry is an Atlanta-based law firm with over 170 years collective experience protecting investor rights and fighting Wall Street greed.