The Hedge Fund Mirage E-Book

Simon A. Lack

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch
• Veröffentlichungsjahr: 2011

Seitenzahl: 317

Beschreibung

The dismal truth about hedge funds and how investors can get a greater share of the profits Shocking but true: if all the money that's ever been invested in hedge funds had been in treasury bills, the results would have been twice as good. Although hedge fund managers have earned some great fortunes, investors as a group have done quite poorly, particularly in recent years. Plagued by high fees, complex legal structures, poor disclosure, and return chasing, investors confront surprisingly meager results. Drawing on an insider's view of industry growth during the 1990s, a time when hedge fund investors did well in part because there were relatively few of them, The Hedge Fund Mirage chronicles the early days of hedge fund investing before institutions got into the game and goes on to describe the seeding business, a specialized area in which investors provide venture capital-type funding to promising but undiscovered hedge funds. Today's investors need to do better, and this book highlights the many subtle and not-so-subtle ways that the returns and risks are biased in favor of the hedge fund manager, and how investors and allocators can redress the imbalance. * The surprising frequency of fraud, highlighted with several examples that the author was able to avoid through solid due diligence, industry contacts, and some luck * Why new and emerging hedge fund managers are where generally better returns are to be found, because most capital invested is steered towards apparently safer but less profitable large, established funds rather than smaller managers that evoke the more profitable 1990s Hedge fund investors have had it hard in recent years, but The Hedge Fund Mirage is here to change that, by turning the tables on conventional wisdom and putting the hedge fund investor back on top.

Leseprobe

Table of Contents

Cover

Title page

Copyright page

Dedication

Introduction

Acknowledgments

Chapter 1 The Truth about Hedge Fund Returns

How to Look at Returns

Digging into the Numbers

The Investor’s View of Returns

How the Hedge Fund Industry Grew

The Only Thing That Counts Is Total Profits

Hedge Funds Are Not Mutual Funds

Summary

Chapter 2 The Golden Age of Hedge Funds

Hedge Funds as Clients

Building a Hedge Fund Portfolio

The Interview Is the Investment Research

Long Term Capital Management

Too Many Bank Mergers

Summary

Chapter 3 The Seeding Business

How a Venture Capitalist Looks at Hedge Funds

From Concept to the Real Deal

Searching for That Rare Gem

Everybody Has a Story

Some Things Shouldn’t Be Hedged

The Hedge Fund as a Business

Summary

Chapter 4 Where Are the Customers’ Yachts?

How Much Profit Is There Really?

Investors Jump In

Fees on Top of More Fees

Drilling Down by Strategy

How to Become Richer Than Your Clients

Summary

Chapter 5 2008—The Year Hedge Funds Broke Their Promise to Investors

Financial Crisis, 1987 Version

How 2008 Redefined Risk

The Hedge Fund as Hotel California

Timing and Tragedy

In 2008, Down Was a Long Way

Summary

Chapter 6 The Unseen Costs of Admission

How Some Investors Pay for Others

My Mid-Market or Yours?

The Benefits of Keen Eyesight

Show Me My Money

Summary

Chapter 7 The Hidden Costs of Being Partners

Limited Partners, Limited Rights

Friends with no Benefits

Watching the Legal Costs

Summary

Chapter 8 Hedge Fund Fraud

More Crooks Than You Think

Madoff

Know Your Audience

Accounting Arbitrage 101

Checking the Background Check

Politically Connected and Crooked?

Paying Your Bills with Their Money

Why It’s Hard to Invest in Russia

After Hours Due Diligence

Summary

Chapter 9 Why Less Can Be More with Hedge Funds

There Are Still Winners

Avoid the Crowds

Why Size Matters

Where Will They Invest All This Money?

Summary

Afterword

Bibliography

About the Author

Index

Copyright © 2012 by Simon Lack. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Lack, Simon, 1962-

 The hedge fund mirage : the illusion of big money and why it’s too good to be true / Simon Lack. – 1

p. cm.

 Includes bibliographical references and index.

 ISBN 978-1-118-16431-0 (hardback); ISBN 978-1-118-20618-8 (ebk); ISBN 978-1-118-20619-5 (ebk); ISBN 978-1-118-20620-1 (ebk)

 1. Hedge funds. 2. Investments. I. Title.

 HG4530.L23 2012

 332.64′524–dc23

2011035473

This book is dedicated to my wife Karen and our three wonderful children Jaclyn, Daniel, and Alexandra.

Introduction

Why I Wrote This Book

It was early 2008, and I was sitting in a presentation by Blue Mountain, a large and successful hedge fund focused on credit derivatives. Its founder, Andrew Feldstein, had previously worked at JPMorgan, and was widely respected in the industry. JPMorgan had been a pioneer in the development of the market for credit derivatives, instruments which allowed credit risk to be managed independently of the loans or bonds from which they were derived. This was prior to the 2008 credit crisis later that year in which derivatives played a key role, and Blue Mountain had generated reasonable returns based on their deep understanding of this new market. The meeting took place around a large boardroom table with a dozen or more interested investors, and the head of investor relations went through his well-honed explanation of their unique strategy and its superior record.

It was boring, and as my attention drifted away from the speaker, I began flipping through the presentation. Interestingly, Blue Mountain included not just their returns but their annual assets under management (AUM) as well. You could see how their business had grown steadily off the back of solid but unspectacular results. Clearly, everyone involved was enjoying quiet, steady success. I was curious how much profit the investors had actually made, since their returns had been moderating somewhat while AUM continued to grow. I started to scribble down a few numbers and do some quick math. Since Blue Mountain also disclosed their fees, which included both a management fee (a percentage of AUM) and an incentive fee (a share of the investors’ profits) there was enough information to estimate how much money the founding partners of Blue Mountain, including its owner Andrew Feldstein, had earned. With what turned out to be good timing in late 2007 they had recently sold a minority stake in their management company to Affiliated Managers Group (AMG), an acquirer of asset management companies. I made a few more calculations. Feldstein was not only very smart, but highly commercial. My back-of-the-envelope calculations showed that the fees earned by Blue Mountain’s principals, including the proceeds from its sale to AMG, were roughly equal to all of the profits their investors had made (that is, profits in excess of treasury bills, the riskless alternative). Blue Mountain had made successful bets with other people’s money and split the profits 50/50. Was this really why some of the largest institutional investors had been plowing enormous sums of money into the hedge fund industry? Was this a fair split of the profits? Was it even typical of the industry, or were Blue Mountain’s principals unusually gifted not only at trading credit derivatives but at retaining an inordinately large share of the gains for themselves? The hedge fund industry had enjoyed many years of phenomenal success, and the collective decisions of thousands of investors, consultants, analysts, and advisors strongly suggested that there must be more value creation going on than my quick calculations implied. So I started to look more closely, and I found that while the hedge fund industry has created some fabulous wealth, most investors have shared in this to a surprisingly modest extent. I tried to think of anyone who had become rich by being a hedge fund investor (other than the managers of hedge fund themselves) and I couldn’t.

Many of the professionals advising investors on their hedge fund investments will be familiar with the conceptual disadvantages their clients face as presented in this book. They will likely be surprised at the numbers and may disagree with some of them (though there can be little doubt about the overall result). But the people best situated to tell this story, the people with the necessary knowledge and insight, are busy still making a living from the hedge fund industry and have neither the time nor inclination to stop doing that. I am a product of the hedge fund industry myself, and it has provided me financial security if not membership on the Forbes 500 List. To counter the obvious charge of hypocrisy that readers may level at this industry insider now disdainfully commenting on his profession, please note: My journey through hedge funds was guided by the same principles I espouse but that too few investors follow. Invest off the beaten track, with small undiscovered managers; negotiate preferential terms, including a share of the business or at least preferential fees and reasonable liquidity; demand (and do not accept less) complete transparency about where your money is. If more investors had done so, their investment results would have turned out to be far more acceptable.

But hedge funds will not disappear, at least certainly not by virtue of this book! There are a great many highly talented managers and that will undoubtedly continue for the foreseeable future. The question for hedge fund investors is how they can more reliably identify the good ones and also keep more of the winnings that are generated using their capital. This book attempts to answer those questions.

Acknowledgments

Many people provided input, support, and ideas as this project made its way to print. I’d especially like to thank Professor Tony Loviscek of Seton Hall University. Tony’s encouragement as well as valuable feedback helped take an essay and turn it into something bigger. David Lieberman read the entire manuscript and provided helpful suggestions. Several people also reviewed individual chapters including Andreas Deutschmann, Miles Doherty, Larry Hirshik, Henry Hoffman, and Andrew Weisman. I am indebted to all of them for their time and interest. I’d like to thank Josh Friedlander of AR magazine, both for ensuring my original essay on hedge fund returns was published and also for his introduction to John Wiley and Sons, the publisher. Laura Walsh, Judy Howarth, Tula Batanchiev, Melissa Lopez, and Stacey Smith at John Wiley tolerated my impatience with the ponderous publishing calendar and guided this project to completion. Finally I’d like to thank my mother Jeannie Lucas, whose many years in financial journalism were invaluable as the initial editor and enthusiastic supporter of her son’s first book.

Chapter 1

The Truth about Hedge Fund Returns

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. When you stop for a moment to consider this fact, it’s a truly amazing statistic. The hedge fund industry has grown from less than $100 billion in assets under management (AUM) back in the 1990s to more than $1.6 trillion today. Some of the biggest fortunes in history have been made by hedge fund managers. In 2009 David Tepper (formerly of Goldman Sachs) topped the Absolute Return list of top earners with $4 billion, followed by George Soros with $3.3 billion (according to the New York Times). The top 25 hedge fund managers collectively earned $25.3 billion in 2009, and just to make it into this elite group required an estimated payout of $350 million. Every year, it seems the top earners in finance are hedge fund managers, racking up sums that dwarf even the CEOs of the Wall Street banks that service them. In fact, astronomical earnings for the top managers have almost become routine. It’s Capitalism in action, pay for performance, outsized rewards for extraordinary results. Their investment prowess has driven capital and clients to them; Adam Smith’s invisible hand has been at work.