The Hedge Fund Mirage | Simon Lack

Summary of: The Hedge Fund Mirage
By: Simon Lack


Embark on a journey through the intriguing world of hedge funds in the book summary of ‘The Hedge Fund Mirage’ by Simon Lack. Unravel the truth behind these fascinating investment vehicles that trace their origins back to 1949. Despite some hedge fund managers accumulating extraordinary wealth, the book exposes the less impressive returns investors have experienced. You will also gain insight into hedge fund accounting, the industry’s evolution from serving elite private investors to targeting institutional clients, and the challenges and risks faced by investors.

Hedge Funds: A Risky Investment

Although hedge funds were created to provide a balanced investment portfolio, investors have not fared well over the years. Despite making some hedge fund managers extraordinarily wealthy, investors have experienced far less impressive returns. Treasuries have outperformed hedge funds since their inception. Furthermore, hedge fund accounting can be misleading, and investments in hedge funds can result in a negative internal rate of return, leading investors to face losses instead of profit. Hedge funds pose a significant risk as they do not guarantee returns, and the investor’s performance could be adversely affected.

The Rise and Fall of Hedge Funds

Discover the history of hedge funds from their humble beginnings to their current status as a $1.6 trillion industry. While once transparent and gentlemanly, the world of hedge funds has become plagued with issues of hubris and greed, leading to the downfall of even the largest funds. Investors must be aware of these pitfalls and demand transparency and accountability from fund managers to ensure success in their investments.

Evolution of Hedge Funds

Hedge funds have undergone a transformation in the 21st century. They are no longer exclusive services for private investors but now target institutional clients like pension funds. They also finance and invest in new, small funds, behaving similarly to venture capital firms or angel investors. However, hedge funds aim for a more moderate 15% to 16% return rather than a high-risk-high-reward approach of ten venture capital investments with a single exponential return.

The Dark Side of Hedge Funds

Hedge funds charge exorbitant fees even when they lose money for investors. A prime example is the “two and twenty” fee arrangement, where the fund manager receives 2% of total investment and a 20% cut of any profits. Convertible arbitrage hedge funds illustrate this problem, where investors lost $2.1 billion between 1998 and 2010, while the funds earned $10.4 billion in fees. Similarly, distressed debt funds lost $23.6 billion of investor capital while collecting $24.3 billion in fees. The result is hedge funds “failing upward” at the expense of investors.

Hedge Funds: Commercial Instincts Outshine Investment Acumen

Hedge funds face losses during the global financial crisis of 2008, with some managers suspending redemptions and legal charges. Despite their commercial success, investment acumen is not their forte. Hedge funds have limited regulatory frameworks, making them a viable avenue for fraudulent activities, and the blame for the financial disaster lies not only with hedge funds but everywhere, including overleveraged banks, poor risk management, national monetary and fiscal policy, shady derivatives, toxic mortgage bonds, and bad bets. Even successful hedge funds like Grosvenor Capital, Citadel, Highbridge Capital Management, and Fortress were affected, and some funds were forced to close as a result.

Hedge Fund Due Diligence

Hedge fund investors must conduct due diligence to avoid sweet-talking scammers like Bernie Madoff, who continue to besmirch the industry’s reputation. Large investors and banks hire private investigators, but individuals must take ownership of their investment decisions and prioritize operational risk management despite the lack of fund transparency. As the saying goes, where are the customers’ yachts?

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