You would think that a person who made a living allocating to hedge funds for more than a decade would take a kinder view of this sector. But Simon Lack, a money manager, earlier this year released a book with devastating conclusions about hedge funds.
Lack's book, The Hedge Fund Mirage , says that for the 13 years up to 2010, investors lost US$308 million through their hedge fund investments, when returns are calculated as gains in excess of Treasury bond yields.
That compares starkly with the US$324 million in fees earned by hedge fund managers over the same period, according to Lack.
The implication of the book is that investors should steer well clear of hedge funds unless they have a clear edge in selecting such funds.
As you can imagine, Lack's broadside was not taken lightly. There were different constituencies that rose to the defence of hedge funds, ranging from an industry association to a professional firm that makes millions in fees from the industry. In all fairness some of the rebuttals made sense. For example, the book measured returns by referencing a hedge fund index (HFRX, which is well known in the industry, but little known outside of it) that may not be representative of all hedge funds. Different indices give different results.
The book adjusted its hedge fund performance estimates downwards to account for "survivor and backfill bias". This basically means that only successful funds report data to index providers (the unsuccessful funds quietly die). This means that hedge fund indexes overstate the returns that funds generate.