A stinging exposé of hedge-fund failures

The Hedge Fund Mirage

By Simon Lack

Simon Lack is not impressed with hedge funds. In The Hedge Fund Mirage, Lack, a professional money manager himself, picks apart the industry, arguing that the wealth accrued by managers is not reflected in the fortunes of their investors. "Never in the field of human finance was so much charged by so many for so little."

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It will be "uncomfortable reading" for the "average Ptrus-swilling hedge fund boss", says Jonathan Ford in the Financial Times right from an opening statistic, which shows that if all the money that had ever been put into hedge funds had been put into US Treasury bills, "the results would have been twice as good". That's even though these returned just 2.3% a year between 1998 and 2010.

Why have these self-styled "Masters of the Universe" failed so badly? One problem is size as hedge funds grew in number and scale, it was harder to come up with "distinctive strategies" or to trade without moving prices in the wrong way. But the biggest reason, predictably, is fees. Between 1998 and 2010, investors received just $9bn, while managers raked in $440bn a "crazy split".

Lack's background as "in essence, a talent scout" for JP Morgan brings a "special perspective" to the hedge-fund business, says George Melloan in The Wall Street Journal. Drawing on "plenty of numbers to back up his central thesis" that hedge funds have been highly overrated Lack "endeavours to lift the veil" on their poor performance, citing "poignant" examples of hedge funds losing everything.

Long-Term Capital Management (LTCM), one of the "most dramatic" cases of a hedge fund going "belly up", lost $4.6bn on "bad gambles". Yet even such high-profile busts didn't put investors off money kept pouring in, helping the industry to grow its assets from $143bn in 1998 to $1,694bn in 2010.

All the time, hedge fund managers were treating themselves to "fabulous toys", says James Pressley on Bloomberg News. But where are all the customers' yachts? To be fair, Lack's "stinging expos" isn't totally against hedge funds "far from it".

He admires John Paulson's bet against the US housing bubble and George Soros's wager against the Bank of England. And he goes beyond number crunching, colouring his "damning" analysis with various stories from his time at JP Morgan, telling of how the bank thankfully declined the chance to invest with fraudster Bernard Madoff.

But the "risks and rewards" he uncovers are so "cockeyed" that his conclusions "ought to drive many hedgehogs, and their investors, into hibernation," says Pressley. "If Lack's calculations are wrong, he can kiss his career goodbye. If he's right, and I think he is, pension funds have a lot of questions to answer."

The Hedge Fund Mirage: The Illusion Of Big Money And Why It's Too Good To Be True, by Simon Lack. Published by John Wiley & Sons. Price: £23.99.