Hedge Funds: A Bad Deal For Investors

A blog about business and economics.
Aug. 9 2012 12:22 PM

The Proof Is In That Hedge Funds Perform Poorly

Simon Lack made a stir with his January book, The Hedge Fund Mirage: The Illusion of Big Money and Why It's Too Good to Be True. I liked it at the time, but it's always possible that an exciting new data-based argument is wrong. Now out comes the Alternative Investment Management Association out with a purported rebuttal to Lack, and like Felix Salmon I'm now more convinced than ever that Lack is right. After all, anyone can cherry pick some data to try to make a provocative argument. It's when people with the time, money, predisposition, and expertise to mount a rebuttal come up with such weak sauce that you know the critic was correct.

The main issue that AIMA keeps coming back to is this. What Lack does is try to track the fate of the typical dollar invested in a hedge fund. He finds that the returns have been dismal. In response, AIMA says we should look instead at the fate of the typical fund rather than weighting the funds by dollars. 


AIMA is an association of fund managers, and as a vindication of fund managers qua people this works fine. Hedge funds became famous and lucrative because a lot of hedge fund managers really did get some very good returns. But this precisely speaks to Lack's point. When hedge funds, as an asset class, were small and relatively obscure they did quite well. That made them bigger and less obscure, but they haven't done well since then. Everyone knows that one of the worst foibles of retail investors is a tendency to chase growth. After, tech stocks appreciate a lot people think to themselves "I should get into high-tech." Then when the market crashes, they think "man stocks are risky, I want to get into something safer." This kind of buy high, sell low trading leads to big losses but it appeals to people's herd instincts. Lack is basically saying that hedge funds as an asset class are just another example of this. The time to get into hedge funds was back when nobody was doing it. Then they did well, and everyone rushed into hedge funds after the gains had already been made. AIMA doesn't rebut this at all. Instead they're basically saying "don't blame us, investors should have gotten in earlier."

That's fine as far as it goes, but it really doesn't undermine Lack's point. There's no special sauce here that's going to let you beat the market, there's just the opportunity to pay higher management fees.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.


War Stories

The Right Target

Why Obama’s airstrikes against ISIS may be more effective than people expect.

The One National Holiday Republicans Hope You Forget

It’s Legal for Obama to Bomb Syria Because He Says It Is

I Stand With Emma Watson on Women’s Rights

Even though I know I’m going to get flak for it.

Should You Recline Your Seat? Two Economists Weigh In.


It Is Very, Very Stupid to Compare Hope Solo to Ray Rice

Or, why it is very, very stupid to compare Hope Solo to Ray Rice.

Building a Better Workplace

In Defense of HR

Startups and small businesses shouldn’t skip over a human resources department.

Why Is This Mother in Prison for Helping Her Daughter Get an Abortion?

Politico Wonders Why Gabby Giffords Is So “Ruthless” on Gun Control

Sept. 23 2014 4:45 PM An Up-Close Look at the U.S.–Mexico Border
  News & Politics
Sept. 23 2014 6:40 PM Coalition of the Presentable Don’t believe the official version. Meet America’s real allies in the fight against ISIS.
Sept. 23 2014 2:08 PM Home Depot’s Former Lead Security Engineer Had a Legacy of Sabotage
Sept. 23 2014 1:57 PM Would a Second Sarkozy Presidency End Marriage Equality in France?
  Double X
The XX Factor
Sept. 23 2014 2:32 PM Politico Asks: Why Is Gabby Giffords So “Ruthless” on Gun Control?
  Slate Plus
Political Gabfest
Sept. 23 2014 3:04 PM Chicago Gabfest How to get your tickets before anyone else.
Brow Beat
Sept. 23 2014 8:38 PM “No One in This World” Is One of Kutiman’s Best, Most Impressive Songs
Future Tense
Sept. 23 2014 5:36 PM This Climate Change Poem Moved World Leaders to Tears Today
  Health & Science
Sept. 23 2014 4:33 PM Who Deserves Those 4 Inches of Airplane Seat Space? An investigation into the economics of reclining.
Sports Nut
Sept. 23 2014 7:27 PM You’re Fired, Roger Goodell If the commissioner gets the ax, the NFL would still need a better justice system. What would that look like?