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You Can Be a Hedge Fund Investor. But Why Would You?

Posted By Barry Ritholtz On May 26, 2013 @ 9:30 am In Apprenticed Investor,Hedge Funds | Comments Disabled

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My Sunday Washington Post column is out. This morning, we look at why hedge fund investing is so very overrated.

The print version had the full headline then there were “You can be a hedge fund investor. But why would you?” (The online version is A hedge fund for you and me? The best move is to take a pass).

Here’s an excerpt from the column:

“Given these increased risks (and higher fees), how have hedge funds performed?

By most measures, not well. They have failed to keep up with major averages when markets were up — and they got mangled (like nearly everyone else) during the 2008-09 downturn. It turns out, most hedge funds are not very hedged.

The latest performance data (via the HFRX Global Hedge Fund Index) reveal that hedge funds haven’t fared well at all: They returned a mere 3.5% in 2012, while the S&P 500-stock index gained 16%. Over the past five years, and the hedge fund index lost 13.6%, while the indices added 8.6%. That’s as of the end of 2012; it has only gotten worse in 2013. Most hedge funds have fallen even further behind their benchmarks this year, gaining 5.4% vs. the market’s rally of 15.4%. As a source of comparison, the average mutual fund is up 14.8%.”

Some of the data on fees is pretty astonishing. According to former JPMorgan Chase hedge fund seed investor author of “The Hedge Fund Mirage [2],” Simon Lack, this fee arrangement is effectively a wealth transfer from investors to managers.

• From 1998 to 2010, hedge fund managers earned $379 billion in fees. Their fund investors reaped only $70 billion in gains.

• Managers kept 84% of investment profits, while investors netted only 16%.

• Fund of funds/ feeders tack on yet another layer of fees, bringing the industry fee total to $440 billion — ~98%

Astonishing. Full article at Washington Post.

 

Source:
You can be a hedge fund investor. But why would you? [3]
Barry Ritholtz
Washington Post, May 26 2013
http://wapo.st/11fgyB2


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2013/05/you-can-be-a-hedge-fund-investor-but-why/

URLs in this post:

[1] Image: http://www.washingtonpost.com/barry-ritholtz/2011/03/31/AFWBwIBC_viewAll.html

[2] The Hedge Fund Mirage: http://www.amazon.com/exec/obidos/ASIN/1118164318/thebigpictu09-20

[3] You can be a hedge fund investor. But why would you?: http://www.washingtonpost.com/business/a-hedge-fund-for-you-and-me-the-best-move-is-to-take-a-pass/2013/05/23/17e4689c-c1b3-11e2-ab60-67bba7be7813_story.html

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