Wiley
Wiley.com
Print this page Share

The Hedge Fund Mirage: The Illusion of Big Money and Why It's Too Good to Be True

ISBN: 978-1-118-16431-0
208 pages
January 2012
The Hedge Fund Mirage: The Illusion of Big Money and Why It
The dismal truth about hedge funds and how investors can get a greater share of the profits

Shocking but true: if all the money that's ever been invested in hedge funds had been in treasury bills, the results would have been twice as good.

Although hedge fund managers have earned some great fortunes, investors as a group have done quite poorly, particularly in recent years. Plagued by high fees, complex legal structures, poor disclosure, and return chasing, investors confront surprisingly meager results. Drawing on an insider's view of industry growth during the 1990s, a time when hedge fund investors did well in part because there were relatively few of them, The Hedge Fund Mirage chronicles the early days of hedge fund investing before institutions got into the game and goes on to describe the seeding business, a specialized area in which investors provide venture capital-type funding to promising but undiscovered hedge funds. Today's investors need to do better, and this book highlights the many subtle and not-so-subtle ways that the returns and risks are biased in favor of the hedge fund manager, and how investors and allocators can redress the imbalance.

  • The surprising frequency of fraud, highlighted with several examples that the author was able to avoid through solid due diligence, industry contacts, and some luck
  • Why new and emerging hedge fund managers are where generally better returns are to be found, because most capital invested is steered towards apparently safer but less profitable large, established funds rather than smaller managers that evoke the more profitable 1990s

Hedge fund investors have had it hard in recent years, but The Hedge Fund Mirage is here to change that, by turning the tables on conventional wisdom and putting the hedge fund investor back on top.

See More
Introduction xi

Acknowledgments xv

Chapter 1 The Truth about Hedge Fund Returns 1

How to Look at Returns 2

Digging into the Numbers 3

The Investor’s View of Returns 6

How the Hedge Fund Industry Grew 10

The Only Thing That Counts Is Total Profits 13

Hedge Funds Are not Mutual Funds 14

Summary 16

Chapter 2 The Golden Age of Hedge Funds 19

Hedge Funds as Clients 20

Building a Hedge Fund Portfolio 22

The Interview Is the Investment Research 24

Long Term Capital Management 27

Too Many Bank Mergers 30

Summary 33

Chapter 3 The Seeding Business 35

How a Venture Capitalist Looks at Hedge Funds 36

From Concept to the Real Deal 38

Searching for That Rare Gem 41

Everybody Has a Story 46

Some Things Shouldn’t Be Hedged 50

The Hedge Fund as a Business 52

Summary 56

Chapter 4 Where Are the Customers’ Yachts? 59

How Much Profi t Is There Really? 60

Investors Jump In 63

Fees on Top of More Fees 65

Drilling Down by Strategy 69

How to Become Richer Than Your Clients 74

Summary 77

Chapter 5 2008—The Year Hedge Funds Broke Their Promise to Investors 79

Financial Crisis, 1987 Version 80

How 2008 Redefi ned Risk 82

The Hedge Fund as Hotel California 85

Timing and Tragedy 93

In 2008, Down Was a Long Way 97

Summary 98

Chapter 6 The Unseen Costs of Admission 99

How Some Investors Pay for Others 101

My Mid-Market or Yours? 104

The Benefi ts of Keen Eyesight 107

Show Me My Money 111

Summary 115

Chapter 7 The Hidden Costs of Being Partners 117

Limited Partners, Limited Rights 118

Friends with no Benefi ts 120

Watching the Legal Costs 125

Summary 128

Chapter 8 Hedge Fund Fraud 129

More Crooks Than You Think 130

Madoff 133

Know Your Audience 134

Accounting Arbitrage 101 136

Checking the Background Check 138

Politically Connected and Crooked? 140

Paying Your Bills with Their Money 141

Why It’s Hard to Invest in Russia 143

After Hours Due Diligence 145

Summary 146

Chapter 9 Why Less Can Be More with Hedge Funds 149

There Are Still Winners 151

Avoid the Crowds 154

Why Size Matters 158

Where Will They Invest All This Money? 166

Summary 168

Afterword 171

Bibliography 177

About the Author 181

Index 183

See More
SIMON LACK has spent his entire career in trading and hedge fund investing. After twenty-three years with JPMorgan, he founded SL Advisors, LLC, a Registered Investment Advisor, in 2009. Much of Lack's career with JPMorgan was spent in North American fixed income derivatives and forward FX trading, a business that he ran successfully through several bank mergers, ultimately overseeing fifty professionals and $300 million in annual revenues. He sat on JPMorgan's investment committee which allocated over $1 billion to hedge fund managers and founded the JPMorgan Incubator Funds, two private equity vehicles that establish economic stakes for emerging hedge fund managers. Lack's financial markets experience dates back to 1980 when he began his career on the floor of the London Stock Exchange.
See More

"Simon Lack, a hedge fund veteran exposes some unforeseen and uncomfortable truths about the industry in his new book." (Hedge Fund Net, January 2012)

"...a cautionary tale from one who knows just about all the tricks...an easy, largely fun and certainly instructive read" (Financial World, February 2012)

"Devastating little book.... His conclusions will make uncomfortable reading for many self-styled 'masters of the universe'.... This book should be required reading for pension fund trustees." (Jonathan Ford, Financial Times, 19th February 2012) 

 

See More
December 20, 2011
The Hedge Fund Mirage

Hedge funds are set to deliver their second worst year in history, exceeded only by 2008, according to data from Hedge Fund Research. "For the ninth straight year, hedge funds will fail to beat a simple blend of 60% stocks and 40% bonds," says Simon Lack, Managing Partner at SL Advisors, LLC, and author of the new book The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True (Wiley; January 2012; $34.95; 978-1-1181-6431-0; Hardcover; Ebook). “The problem is that the hedge fund industry is overcapitalized,” Lack says. “Hedge funds have made tremendous amounts of money, but it hasn’t made its way back to the clients. In fact, if all of the money that’s ever been invested in hedge funds over the history of the industry had been invested in treasury bills instead, the results would have been twice as good.”

Lack exposes the truth about hedge funds: as a result of high fees, complex legal structures, poor disclosure, and return chasing, investors have ended up with meager results. Drawing on his insider view during the 1990s, a time when hedge fund investors did well in part because there were relatively few of them, The Hedge Fund Mirage chronicles the early days of hedge fund investing before institutions got into the game; describes the seeding business—a specialized area in which investors provide venture capital-type funding to promising but undiscovered hedge funds; reveals the surprising frequency of fraud, highlighted with several examples that Simon was able to avoid through solid due diligence, industry contacts, and luck; and examines why new and emerging hedge fund managers are where generally better returns are to be found, because most capital invested is steered towards apparently safer but less profitable large, established funds.

Dispelling the Myths of Hedge Fund Success 

  • The hedge fund industry has grown from less than $100 billion assets under management back in the 1990s to more than $1.6 trillion today.
  • The top 25 hedge fund managers collectively earned $25.3 billion in 2009. Just to make it into this elite group required an estimated payout of $350 million.
  • While hedge funds did well in the 1990s, since 2002, they have failed to outperform a traditional 60/40 portfolio of stocks and bonds. They are down 8.5% for the year; the overall U.S. Stock Market is down about 2% for the year.

The book also demonstrates how to identify the good hedge funds and keep more of the winnings that are generated using their capital. Lacks advises hedge fund investors to invest the way they did in the 1990s: look for smaller funds that are not well followed and utilize obscure and off-the-beaten-track strategies. The vast majority of hedge funds did better when they were smaller, and so did the industry as a whole. Careful due diligence is necessary to ensure the quality of returns, valuation procedures and other qualitative metrics are acceptable.

“Investors who can recognize what made the industry so successful will demand better terms, transparency, liquidity, fees, and information. They’ll redress the current huge imbalance that exists between the industry and its clients. By investing in hedge funds that look more like yesterday’s, they are likely to find the household name of tomorrow and get a fairer deal for themselves.”

See More
Back to Top