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The Hedge Fund Mirage

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The Hedge Fund Mirage

The Illusion of Big Money and Why It’s Too Good to Be True


15 min read
10 take-aways
Text available

What's inside?

Hedge funds are often flops and sometimes frauds.

Editorial Rating



  • Innovative


Are hedge funds – those secretive oceans of capital invested in exotic financial instruments and derivatives – all they appear to be? Absolutely not, says Simon Lack, a former JPMorgan executive and hedge fund insider. He uses statistics and anecdotes – mostly horror stories and cautionary tales – to back up his controversial but simple thesis: Hedge funds are not good investments for most portfolios. Lack mentions a few success stories, touching on investment luminaries George Soros and John Paulson, but gives more attention to the industry’s colorful incompetents and villains. The book’s flaws are manageable – make sure to bring your calculator, because Lack includes math about internal rate of return calculations and discusses the best ways to measure hedge fund results. Some reviewers have questioned some of his calculations and comparative conclusions, so gather all the data you can, as always. Lack packs in lots of useful insight, especially in caveats for investors. getAbstract – which gives book advice but never, ever investment advice – recommends his report on the hedge fund industry to investors who work to stay informed.


Unimpressive Returns

Hedge funds trace their origins back to 1949, when Alfred Winslow Jones had the revolutionary idea of balancing long and short positions in an investment portfolio. His techniques, and others developed later, have made some hedge fund managers extraordinarily wealthy. In 2009, the leading 25 hedge fund managers accounted for $25.3 billion in earnings, a minimum of $350 million each. However, hedge fund investors experienced far less impressive returns. In fact, since the inception of hedge funds, Treasury bills have outperformed them.

Hedge fund accounting can mislead in myriad ways. For example, say an investor puts money in a hedge fund and it goes up 50% in the first year. That happy client then adds more money in the second year, but the fund declines by 40%. The investor will show a negative internal rate of return, however, the hedge fund manager will average the returns from the two years and come up with a 5% annual gain. This “geometric return” may appear adequate for the hedge fund manager’s purposes. But – surprise – the investor’s account will still show a loss, not a profit.

Growth of Hedge Funds

Investment cognoscenti...

About the Author

Simon Lack, a veteran JPMorgan investment committee member and founder of the JPMorgan Incubator Funds, now runs SL Advisors LLC, a money management company.

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