the hedge fund mirage: the illusion of big money and why it’s too good to be true
DESCRIPTION
Although hedge fund managers have earned some great fortunes, investors as a group have done quite poorly, particularly in recent years.TRANSCRIPT
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The Hedge Fund Mirage
The Illusion of Big Money and Why Its TooGood To Be True
By Simon Lack
THE FALLACY OF HEDGE FUNDS
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If all the money thats ever been invested in HedgeFunds had been put in treasury bil ls instead, the results
would have been twice as good.
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How Have Hedge Fund Investors ReallyDone?
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The Alternative to Alternatives
0%
1%
2%
3%
4%
5%
6%
7%
8%
Hedge Funds Stocks Bonds T Bills
Annual Returns 1998-2013
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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
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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
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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
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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
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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
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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
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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
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What Went Wrong?
Fees
Transparency
Size
Investor Protections
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Why You Run a Hedge Fund
YearAvg AUM
(BNs)HFRX
Real InvestorProfits (BNs)
Est Total Fees(BNs)**
Fees as % ofAUM
Total ProfitsIndustryShare of
Total Profi ts
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
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Est HF Fees (BNs)**Est FOF Fees (BNs)
Real Investor Profits (BNs)
Slicing the Pie1998-2013
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Bid/Ask Impact with noLeverage
Bid/Ask Impact with noLeverage
Bid/Ask Impact with 5XLeverage
Bid/Ask Impact with 5XLeverage
Why Transparency Matters
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Costs Arent Equally Shared
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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
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Less Transparency Than
Public Equities and Debt
Private Equity
Real Estate
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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
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