InvestmentNews recently published a lengthy excerpt from Simon Lack’s book entitled “The Hedge Fund Mirage: The illusion of Big Money and Why It’s Too Good to be True” (“Hedge funds benefit insiders only”). Mr. Lack studied the matter and concluded that the appeal of hedge funds has no sensible basis. While there are occasional shooting stars, by and large, hedge fund performance has been disappointing. Most investors would have been better off putting their money in U.S. Treasury securities.
The only thing big about hedge funds is the fees. The typical hedge fund uses the “2 and 20” fee structure, in which the hedge fund manager takes a 2% management fee plus 20% of the profits over a certain amount as an incentive fee. What other investment puts investors into such a deep hole right off the bat?
Mr. Lack points out that a superstar of hedge funds – George Soros – made his first fortune from fees he charged for managing money, and only later became a significant investor in his hedge fund. Similarly, Steve Cohen made so much money from fees managing hedge fund money that pretty soon most of the money he was managing was his own. No wonder Warren Buffett called hedge funds manager compensation schemes.
The things most investors need to remember about hedge funds is that they cannot be readily liquidated, they lack transparency compared to mutual funds, they are expensive, they are too risky for the returns they provide on average, and, while many hedge fund managers have done extraordinarily well, investors who have done extraordinarily well are hard to find, according to Mr. Lack. For more information, see What Every Investor Should Know About Hedge Funds.
Page Perry is an Atlanta-based law firm with over 150 years of collective experience maintaining integrity in the investment markets and protecting investor rights.