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Where Has All the Money Gone?


The reason that investors in general didn't do so well in hedge funds was largely due to the fees. It's better to manage a hedge fund than invest in one.

A joke from the 1920s is still told today. A visitor to New York went to the Yacht Club and admired the vessels that the bankers and brokers had in the marina. He then asked, “Where the customers' yachts?” The answer: “There are none.”

Though the above story might have been a joke in the 1920s, no one is laughing today. Customers are wondering why they don’t have expensive foreign cars, opulent houses or more money in their bank accounts, but their financial advisers do. They don’t have to wonder anymore. One money professional is willing to tell them.

The Hedge Fund Mirage

In an all-out exposé, Simon Lack, author of (Wiley, 2012) declares, “If all the money that’s ever been invested in hedge funds had been put in Treasury bills instead, the results would have been twice as good.” This is from a man that spent 23 years with JP Morgan, and after he left founded his own advisory firm.

While at JP Morgan, Lack was part of its investment committee that distributed over $1 billion to hedge fund managers. Lack is a man who should know what he is talking about based on firsthand experience.

Lack’s depiction is in sync with the conclusion of three academics, Christopher Clifford, Adam Aiken and Jesse Ellis. They found that during a five-year period the average excess return of hedge funds was not the 3% to 5% per year that is usually touted, but close to zero.

Of course, not all hedge fund investors did poorly. Those that participated in the top tier funds likely made a profit (though it is virtually impossible to predict in advance which funds these might be). Others who were able to get in and out at expedient times, whether through skill or luck, may also have made a good return. But overall, the average guy didn’t do so well, at least according to Lack, Clifford, Aiken and Ellis.

Now to the crux of the matter: the reason that investors in general didn’t do so well in hedge funds was largely due to the fees. Normally, they are 2% per year whether the fund is up or down and 20% on top of that if the fund is above water. Of course the latter depends on market momentum as well as manager skill and, some would say, insider information.

Lack’s story as a Wall Street insider is that it is much better to manage a hedge fund than to invest in one. That way you are sure to make a profit.

Modern Pioneers of Wall Street: Female Hedge Fund Managers: Women hedge fund managers outperformed men in the last decade.

Private Equity: Public Injustice? Private equity, like hedge funds, seems not to be pulling its weight.

For further reading:

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Victor J. Dzau, MD, gives expert advice
Victor J. Dzau, MD, gives expert advice