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

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

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Although hedge fund managers have earned some great fortunes, investors as a group have done quite poorly, particularly in recent years.
Although hedge fund managers have earned some great fortunes, investors as a group have done quite poorly, particularly in recent years.

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Published by: ValueWalk on Jun 09, 2014
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06/30/2014

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The Hedge Fund Mirage

The Illusion of Big Money and Why It’s Too
Good To Be True
By Simon Lack
THE FALLACY OF HEDGE FUNDS
1
2
“ If all the money that’s ever been invested in Hedge
Funds had been put in treasury bills instead, the results
would have been twice as good.”
3
4
5
6
How Have Hedge Fund Investors Really
Done?
7
“The Alternative to Alternatives”
0%
1%
2%
3%
4%
5%
6%
7%
8%
Hedge Funds Stocks Bonds T Bills
Annual Returns 1998-2013
8
“The Alternative to Alternatives”
-30%
-20%
-10%
0%
10%
20%
30%
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
1998 2000 2002 2004 2006 2008 2010 2012
Returns %
AUM $TN
Hedge Fund Investor Returns and AUM Growth
9
“The Alternative to Alternatives”
-$0.6
-$0.4
-$0.2
$0.0
$0.2
$0.4
$0.6
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
1998 2000 2002 2004 2006 2008 2010 2012
Returns $TN
AUM $TN
Hedge Fund Investor Profits and AUM Growth
10
“The Alternative to Alternatives”
How Hedge Fund Investors Have Done
-30%
-20%
-10%
0%
10%
20%
30%
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
1998 2000 2002 2004 2006 2008 2010 2012
We were better…
-$0.6
-$0.4
-$0.2
$0.0
$0.2
$0.4
$0.6
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
1998 2000 2002 2004 2006 2008 2010 2012
…when we were smaller
11
“The Alternative to Alternatives”
Why Investors Fell in Love
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
-30%
-20%
-10%
0%
10%
20%
30%
1998 2001 2004 2007 2010 2013
Hedge Fund Returns
(HFRX)
60/40
AUM $TN
12
“The Alternative to Alternatives”
Why Investors Fell in Love
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
-30%
-20%
-10%
0%
10%
20%
30%
1998 2001 2004 2007 2010 2013
Hedge Fund Returns
(HFRX)
60/40
AUM $TN
13
“The Alternative to Alternatives”
-$500
-$400
-$300
-$200
-$100
$0
$100
$200
$300
1998 2001 2004 2007 2010 2013
Est FOF Fees (BNs)
Est HF Fees (BNs)
Real Investor Profits (BNs)
Investor Profits and Fees 1998-2013
14
“The Alternative to Alternatives”
-$500
-$400
-$300
-$200
-$100
$0
$100
$200
$300
1998 2001 2004 2007 2010 2013
Est FOF Fees (BNs)
Est HF Fees (BNs)
Real Investor Profits (BNs)
Investor Profits and Fees 1998-2013
15
What Went Wrong?
 Fees
 Transparency
 Size
 Investor Protections
16
Why You Run a Hedge Fund
Year
Avg AUM
(BNs)
HFRX
Real Investor
Profits (BNs)
Est Total Fees
(BNs)**
Fees as % of
AUM
Total Profits
Industry
Share of
Total Profits
1998 $131 13% $10 $7 6% $17 44%
1999 $166 27% $35 $15 9% $51 30%
2000 $213 14% $16 $13 6% $29 44%
2001 $279 9% $12 $13 5% $25 52%
2002 $414 5% $11 $15 4% $26 58%
2003 $666 13% $79 $38 6% $118 33%
2004 $1,027 3% $9 $32 3% $42 78%
2005 $1,295 3% -13 $42 3% $29 143%
2006 $1,537 9% $58 $75 5% $133 56%
2007 $1,925 4% -$21 $70 4% $48 144%
2008 $1,797 -23% -$458 $46 3% -$412 -11%
2009 $1,506 13% $193 $37 2% $230 16%
2010 $1,624 5% $77 $38 2% $115 33%
2011 $1,702 -9% -$158 $40 2% -$119 -33%
2012 $1,754 4% $54 $41 2% $95 43%
2013 $1,978 7% $125 $45 2% $170 26%
Total $30 $566 $596
17
Est HF Fees (BNs)**
Est FOF Fees (BNs)
Real Investor Profits (BNs)
Slicing the Pie
1998-2013
18
Bid/Ask Impact with no
Leverage
Bid/Ask Impact with no
Leverage
Bid/Ask Impact with 5X
Leverage
Bid/Ask Impact with 5X
Leverage
Why Transparency Matters
19
Costs Aren’t Equally Shared
20
“The Alternative to Alternatives”
Size vs. Returns 1998-2013
-30%
-20%
-10%
0%
10%
20%
30%
$0.0 $0.5 $1.0 $1.5 $2.0 $2.5
21
Less Transparency Than…
 Public Equities and Debt
 Private Equity
 Real Estate
22
“The Alternative to Alternatives”
Hedge Funds Are Over-Capitalized
-$0.6
-$0.5
-$0.4
-$0.3
-$0.2
-$0.1
$0.0
$0.1
$0.2
$0.3
1998 2000 2002 2004 2006 2008 2010 2012
Returns $TN
7% on $2TN
23
24

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