Hedge Fund Heroes Getting Battered


Unfortunately, many investors are experiencing first hand the truism that hedge fund managers rarely outperform the market on consistent basis.

John Paulson, the hedge fund manager who made a killing when Goldman Sachs let him select bad CDO assets, which he turned around and bet against, is having a tough time in 2011. His hedge fund has declined nearly 50% this year as a result of a massive positions in Bank of America, which had lost half of its value by October, Rupert Murdoch’s scandal-plagued News Corp., which owns Fox News, and Sino-Forest Corp., which imploded after an accounting scandal.

Bill Ackman, a hedge fund manager who was wildly successful as an early shorter of subprime, is down 16% this year, after accumulating a $1 billion stake in Citigroup and watching it fall by 1/3. Like many hedge fund managers, Ackman generally takes huge positions in just a handful of companies.

Bruce Berkowitz, who bets big on turnaround situations, has been hammered by huge positions in Bank of America and American International Group (only the U.S. government has a larger position in AIG).

Hedge fund managers owe whatever success they have to a combination of skill and luck, and “the luck part of the equation can turn on you quickly,” said one asset manager who invests client money in hedge funds. Informed observers say luck (good or bad) plays the more important role.

Hedge fund clients are getting more skittish and short-term oriented. Barclays surveyed 150 of them and found that 35% planned to get out of poor performers and another 20% were thinking about it.

Anyone considering investing in a hedge fund or other alternative investment should read the excellent book on alternative investments, The Only Guide to Alternative Investments You’ll Ever Need, by Larry E. Swedroe and Jared Kizer, which concludes:
“historical evidence demonstrates that once viewed on a risk adjusted basis, the average hedge fund has a hard time keeping pace with Treasury bill returns.”

One reason for hedge funds’ poor risk-adjusted returns is the fact that hedge funds typically charge high fees. Investors routinely pay the fund manager a base management fee of 2% or more of total assets, plus a performance fee of 20% of the profits or more.

Page Perry is an Atlanta-based law firm with over 150 years collective experience representing investors in hedge fund-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. For further information, please contact us.