There definitely are hedge funds that earned their investors a great return over a good many years, Soros' Quantum Funds, Julian Robertson, Bruce Kovner, and a couple more that provided an outstanding ROI over a time perod longer than, say, 15 years plus. Very few managed an annualised return north of 15 % over 15 plus years. And that is a subject that is too often left unmentioned, talking of the multitude of hedge funds that decimated their assets under management, either through sheer incompetence, the Icarus syndrome as with LTCM with a total misunderstanding of risk, too much money chasing the same strategies, or downright criminal energy.
Here is a thought provoking article from Forbes about the industry, bit on the long side so I'll put in several posts, but definitely worth a read:
>>>The $500 Billion Hedge Fund Folly
James M. Clash, Robert Lenzner and Michael Maiello with Josephine Lee, 08.06.01
What's so alluring about unregulated investment partnerships? They soak you with high fees and underperform the market.
What do Barbra Streisand, Senator Robert Torricelli and Bianca Jagger have in common? They have all lost money investing in hedge funds.
You don't have a hedge fund to brag about at lawn parties? That could be because you're too timid to swing for the fences, as these private investment partnerships often do with leverage and exotic derivatives. It could be because you are not well connected. Hedge funds, after all, cannot advertise, so you have to know someone to get in one. Maybe you are not rich enough. These funds for the elite are allowed to take only "sophisticated" investors, defined as people with a $200,000 annual income or a $1 million investable net worth.
Or maybe you are not in a hedge fund because you know better.
Mediocre returns, outrageous fees and a whiff of scandal have not stopped the hedge fund business from enjoying explosive growth in the past decade. Because these investment pools are under no obligation to report their assets or returns to the Securities & Exchange Commission, there is no official measure of their size. But advisers and consultants who work in this field believe that there are at least 6,000 of them out there, with more being created every day. Combined assets probably top $500 billion, according to London-based Global Fund Analysis, which collects data on 2,700 hedge funds. Insiders estimate the total in 1990 was just $15 billion.
The surge in assets probably has something to do with the long bull market, which, despite the weakness of the last year, has left investors with a lot more money to play with. Then, too, the recent correction probably hasn't hurt, since some hedge funds promise to be "market-neutral," meaning they can make money whether the stock market is going up or down. The other factor behind the hedge fund stampede is a psychological one. Celebrities are getting into hedge funds, as are Ivy League endowment programs and even state pension plans. So why not me?
The industry--or, at least, the term "hedge fund"--dates back to 1949 and money manager Alfred Winslow Jones. He pitched the notion that a smart money man could protect investors against market spills by going long some stocks and short others. You'd buy Dow Chemical, say, and short DuPont, and (if you picked the right companies) make money whether the chemical sector went up or down. Since regulated mutual funds back then were not permitted to sell short, these portfolios had to be offered privately in limited partnerships. Jones and his imitators had a run of success for quite a while selling their investment products, but the business fell into disrepute in the 1973-74 market crash. Hedge funds that held restricted securities (not freely salable to the public) got killed.
Trust Me
If you mess up on Wall Street, don't despair. There's room for you in the very forgiving world of hedge funds, where you can get a second chance-witness these financiers.
Michael Berger lost $500 million when Manhattan Investment blew up.
Joseph Jett, disgraced ex-Kidder, Peabody trader, founded Cambridge Matrix.
John Meriwether, Long-Term Capital's bungler, now runs JWM Partners.
Memories of that disaster have faded, and private funds have come back to Wall Street with a vengeance. For many the "hedge" is in name only. They may make lopsided leveraged bets on the direction of the stock market or interest rates. They don't always stick to stocks. Some play with currencies, some make arbitrage bets on convertible bonds, some go in and out of mutual funds looking for market "inefficiencies." And extreme leverage is sometimes part of the game. That's what sank the infamous Long-Term Capital Management three years ago, nearly taking down the whole bond market with it.
George Soros
If it isn't hedging that defines the genre, what is it? Outsize returns? Not exactly. Some hedge funds have done spectacularly well: Pinnacle Equity made 456% last year; George Soros and Julian Robertson made billions for their early investors. But plenty have been failures: Askin Capital Management and Niederhoffer Investments Fund are among the more spectacular blowouts that destroyed their customers' investments.
We have looked for common features in this thriving industry--which by law caps each fund at 99 investors by the traditional definition (499 if they have $5 million to invest)--and have come up with the following definition: A hedge fund is any investment company that is unregulated, has limited redemption privileges and charges outrageous fees.
The compensation system for hedge fund managers works like the one for racetrack touts. These are the characters who hang around the betting window offering tips and expect a piece of your winnings if a tip works out. If the horse loses, the tout is nowhere to be found.
