Simon Lack And The Hedge Fund Mirage. Simon Lack knows there are hedge fund investors who have done well on their investments—he just thinks they’re the exception, not the rule.“There are great hedge funds, there are happy clients,” the author of The Hedge Fund Mirage: The Illusion of Big Money and Why it’s Too Good to Be True, says. They haven’t got a conventional, institutional, diversified portfolio. It’s a high net- worth investor who’s got a couple of funds where he knew the manager well and invested a long time ago and it’s worked out really well. The Hedge Fund Mirage.”“Many of us in the industry looked at the arguments in the book with initial interest, and then growing skepticism,” AIMA CEO Andrew Baker said. Where there were figures, the methodology was flawed. We noticed that no one praising the book appeared to have actually checked the numbers behind it. We began to wonder if The Hedge Fund Mirage was itself an illusion.”AIMA raises a number of issues with Lack’s book (one of which is the result not of flawed methodology but of a typographical error), but the crux of its case against The Hedge Fund Mirage, says Lack, is that he uses dollar- weighted figures to evaluate hedge fund performance.“The internationally accepted Global Investment Performance Standards strongly advocate the use of time- weighted data for assessing hedge fund performance,” AIMA wrote in its rebuttal. Theoretically, what buy- and- hold return does is just take a simple geometric average—it doesn’t consider any of the capital flows coming into the fund or going out of the fund. The hedge fund mirage the illusion of big money and why its too good to be true author simon a lack jan-2012 PDF hedge fund trading strategies. In this summary, you will learn Why hedge fund managers do better financially than their investors; Why information about hedge funds is often hard to find or validate; What financial and legal issues to consider. Simon Lack knows there are hedge fund investors who have done well. The Hedge Fund Mirage, says Lack. The hedge fund mirage the illusion of big money and why its too good to be true author simon a lack jan-2012 PDF the hedge fund mirage the illusion. Following 23 years with JPMorgan, Simon Lack founded SL Advisors, LLC, in 2009. The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True, published in 2011 to widespread praise from mainstream. The Hedge Fund Mirage PDF da Simon A. Simon Lack demonstrates, astonishingly, that the industry itself has repeated that dismal story of early promise. A Response to Simon Lack. This is an unsolicited review of Simon Lack’s The Hedge Fund Mirage from Christopher Cruden. It actually considers when the fund’s assets were getting bigger and when they were getting smaller, and by considering that weight you can actually see how well the investors were timing—when they were getting into the fund at the right time, when future returns were going up and when they were getting out at the right time, when the future returns were going down. It’s a subtle distinction but it makes a big difference.”What it boils down to, Yu says, is, “What do we mean by hedge fund performance?”“If you mean the experience of the investors, dollar- weighted returns will be a good way to assess the investor’s experience. If it comes to the fund’s performance, buy- and- hold return will be a good way to measure this. But when people vaguely say . A little disappointingly, we didn’t find any results there. Having sat for years on the bank’s investment committee and assisted in the allocation of billions to hedge funds, Lack said he’d long suspected the money was actually in the fees—so much so that in 2. I sat down and figured it out and I was staggered,” Lack says. People ought to know this.’”He wrote an article for AR magazine and, encouraged by the response, he decided to expand his thesis into a book. The Hedge Fund Mirage. That book, published earlier this year by John Wiley and Sons, has been well- received in the financial press and Lack, writing in April on his blog, In Pursuit of Value, claimed that many industry insiders “readily acknowledge the disappointing results of the past with little surprise.”In his opening chapter, “The Truth About Hedge Fund Returns,” Lack makes his case for looking at hedge fund performance from the investor’s perspective: The hedge fund industry routinely calculates returns based on the value of $1 invested at inception. And it’s true that, based on the HFRX Global Hedge Fund Index, if you had invested $1 million in the average hedge fund in 1. But hedge funds did best in the early years, when the industry was much smaller. Just as small hedge funds generally outperform large ones, a small hedge fund industry did better than a large one. When you adjust for the size of the hedge fund industry, the story is completely different. Rather than generating a return of 7. There were fewer hedge fund investors in 1. It’s the difference between looking at how the average hedge fund did versus how the average investor did. Lack illustrates his point with the following example: If in Year 1 you invest $1 million and the fund returns 5. If Year 2 you invest another $1 million (for a total investment now of $2. The manager, writes Lack, will report this as an average annual return of 5%, but the investor’s actual internal rate of return is a loss of 1. Where Are The Customers’ Yachts? Then there’s the question of fees. Lack asserts that since 1. He’s calculated that as “excess profits over Treasury bills,” a move AIMA disputes.“In its fees calculations the book also misleadingly excludes the risk- free rate from hedge fund returns, which has a similarly distorting effect on the final figures produced,” the industry group said. But Lack defends his method. But, in fact, they give the example, . That’s just an opinion, people can debate it, but why would you pay somebody 2% and 2. Treasury bills?”AIMA also objects to his definition of “profits. It doesn’t really matter, when you’re an investor, whether what you pay the manager is incentive compensation or goes to pay for Bloomberg or whatever. As an investor, you just care about what it costs you to access the strategy. My point is, this is the revenue line of the hedge fund industry and was that revenue, which was obviously an expense for the client, money well spent or not?”AIMA cites data from the Center for Hedge Fund Research which finds that hedge funds returned 7. But Lack says AIMA is simply “wrong.”“They have a 9% average annual return for hedge funds since 1. First of all, an equally- weighted portfolio is a nice concept but, obviously, everybody can’t have an equally- weighted portfolio because hedge funds are not all the same size. Second, within that 9% average annual return from 1. So, it’s true, the average annual return for that hypothetical, equally- weighted portfolio is 9%, but you had some great years in the . And as more people have shown up, the returns have gone down. I’d say that’s why they’ve gone down; I think AIMA would say that’s not why they’ve gone down.”Lack takes it as a given that smaller hedge funds perform better than larger ones and says winning funds become victims of their own success because they attract more money than they can profitably invest. Fee structures being what they are, it’s tempting for managers to grow assets. The result, he wrote on his blog, has been “an enormous transfer of wealth from clients to the hedge fund industry. My analysis shows that pretty much all the profits earned by hedge funds in excess of the risk- free rate have been consumed by fees.”How to Invest in Hedge Funds. Given that bleak assessment, it seems odd to even ask Lack if there’s any value in investing in hedge funds—but we did. Lack says there are talented people running hedge funds and there is money to be made, but it won’t be made by people who accept the conventional wisdom that diversification is the key to successful hedge fund investing.“With hedge funds,” he says, “the only way to win is if you’re good at picking managers. If you get the average return you’ll be a loser. The more you diversify, the more you’ll have a hedge fund portfolio that looks like the average return and the average return is not what you want. What you should do as a hedge fund investor is have a very concentrated portfolio of two to three hedge funds instead of 1. The caveat, he says, is that if you’re only allocating to a few hedge funds you should only allocate a small percentage of your investment portfolio to hedge funds.“The right way for people to use hedge funds is to make a small allocation—less than 5%—and to invest in a small number of managers where your insight and your skill at manager selection has the best chance to generate a return for you. I know that that creates a problem for a pension fund that’s trying to reach an 8% return target and is relying on hedge funds to get them there. I understand that’s a problem and I’m sorry, I just don’t think hedge funds are going to do it for you.”As for Gwen Yu, whose research focus has shifted from hedge funds to global capital flows, she says she'll pass. Yu would “probably not.
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