value and opportunity

The author of this book is a former JPM banker who ran an “in-house” fund-of-fund hedge fund pool of money.

The big idea of the book is the fact that if you calculate a “money weighted” performance for hedge funds, the sum of all returns hedge fund investors have earned since the 1990ties is less than if they would have invested in treasury bills.

The “Money Weighting” return method does not adjust for in and outflows of money into a fund. “Money weighting” is usually used for Private equity funds and real estate funds because there the fund managers can control the in and outflow of money. For open-ended investment funds, the “time weighted” series is a better proxy because here the fund manager has no control on money flows.

Simon Lack argues that for Hedge funds, the money weighted method is much more appropriate because hedge funds to a very large extent can control their in and outflows. However in “standard” asset allocation models and performance measurements, hedge funds calculate their returns time weighted.

The author uses only broadly available data and then calculates a money weighted return for the hedge fund industry since the early nineties and comes to the quite sobering result as mentioned above.

This low return for investors basically results out of two main factors:

1. Returns for the hedge fund industry were much higher when the industry was small ( 100 bn USD in the early 90ties).
2. Returns for the hedge fund managers have been gigantic

As in the book “Where are the customer’s yachts” the author asks: Where are the rich hedge fund investors ? There are plenty of billionaire hedge fund managers but apart from the Harcard and Yale foundation, few investors really made money with those hedge funds over time.

According to the author, there are some good hedge funds, especially small ones with “hungry” managers, but those funds are difficult to find and hard to get in.

Summary:
Overall, I find it a good book, written from an insider with a very simple but powerful idea. I guess this book will not be very popular with the asset consultant and hedge fund industry. It clearly shows that hedge funds as a group are not the great asset class which will save pension funds but rather a brilliant marketing trick to make some people very rich.