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Mix-Ansicht- The great hedge fund rip-off - leibovitz, 13.12.2001, 17:43
The great hedge fund rip-off
Peering over the hedge
Hedge funds: Promise much, perform little. Such is the attitude of the hedge fund industry. The prospectuses for new funds typically promise a 15% return on long-short equity strategies. With US interest rates below 2% and the stock market going nowhere, this would require investment returns of more than 6% on both the long and short positions in the portfolio. Very few managers have ever been able to outperform the market by this amount. These are not the only figures generated by the hedge fund marketers which need be treated with suspicion.
According to Harry Kat and Gaurav Amin of the University of Reading, the data on historic hedge fund performance is not reliable. High rates of attrition among hedge funds - over a 5-year period more than 40% have disappeared - means that performance figures collected by various data providers tend to exaggerate the returns that investors actually received. Furthermore, averages of returns from hedge fund indices conceal a wide distribution of returns for both individual hedge funds and different classes of funds. Again, the experience of most investors will be different from published performance figures.
Kat and Amin maintain there is no evidence that hedge fund managers as a whole generate the ‘alpha’ - the above market returns - which they promise. In which case, they hardly deserve the generous fees - typically 1% of funds under management and 20% of profits - which they charge investors. Nevertheless, having some part of an equity portfolio in a long-short fund still provides useful diversification. Fund management companies should offer such services with a more conventional, and less avaricious, fee structure.
http://www.breakingviews.com/ve.asp?lid=1&sid=3477
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