Friday, February 10, 2012
The wealth of top hedge fund managers is the stuff of legend, but how about their clients - the "sophisticated" investors such as pension funds and wealthy individuals?
As Wall Street veteran Simon Lack says in his new book The Hedge Fund Mirage, "Who can name even one hedge fund investor whose fortune is based on the hedge funds he successfully picked?"
According to Lack, only a handful of superstar hedge fund managers made most of the industry's profits. As a broad investment class, he finds hedge funds to have been a terrible place to keep your money:
"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."
An even more shocking conclusion from the book is about the fees that hedge funds collect - which really kill any hope of a good return.
After crunching the data, Lack found that, from 1998 - 2010, investors made $70 billion, while hedge funds pocketed $379 billion in fees!
In conclusion, Lack feels that the fault doesn't lie with the hedge fund managers, but with the "sophisticated investors".
I agree, because one thing I have found during my almost 20 years of trading experience is that, in finance, people believe the complex and exotic is superior. They feel sophisticated and intelligent when, at cocktail parties, they can brag about investing in sexy things like hedge funds.
Every time I tried to trade sophisticated, leveraged instruments like futures or options or on margin, I underperformed or lost money. Instead, when I switched to trading plain old stocks using the Stock Trading Riches formula - which is simple, dull, and boring - I started doing very well.
Labels: Personal Finance