The Hedge Fund Mirage - Advisor Perspectives

THE FALLACY OF HEDGE FUNDS
The Hedge Fund Mirage
The Illusion of Big Money and Why It’s Too
Good To Be True
By Simon Lack
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2
“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.”
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4
5
6
How Have Hedge Fund Investors Really
Done?
7
Annual Returns 1998-2013
8%
7%
6%
5%
4%
3%
2%
1%
0%
Hedge Funds
“The Alternative to Alternatives”
Stocks
Bonds
T Bills
8
Hedge Fund Investor Returns and AUM Growth
30%
$2.5
20%
$2.0
10%
$1.5
0%
$1.0
-10%
Returns %
$0.5
-20%
AUM $TN
-30%
$0.0
1998
2000
2002
“The Alternative to Alternatives”
2004
2006
2008
2010
2012
9
Hedge Fund Investor Profits and AUM Growth
$2.5
$0.6
$0.4
$2.0
$0.2
$1.5
$0.0
$1.0
Returns $TN
-$0.2
AUM $TN
$0.5
-$0.4
$0.0
-$0.6
1998
2000
2002
“The Alternative to Alternatives”
2004
2006
2008
2010
2012
10
How Hedge Fund Investors Have Done
We were better…
…when we were smaller
$2.5
30% $2.5
$0.6
20% $2.0
$0.4
$2.0
10%
$0.2
$1.5
$1.5
$0.0
0%
$1.0
$1.0
-$0.2
-10%
$0.5
-20%
$0.0
$0.5
-$0.4
-30% $0.0
1998 2000 2002 2004 2006 2008 2010 2012
“The Alternative to Alternatives”
-$0.6
1998 2000 2002 2004 2006 2008 2010 2012
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Why Investors Fell in Love
30%
$2.5
20%
$2.0
10%
$1.5
0%
Hedge Fund Returns
(HFRX)
60/40
$1.0
-10%
AUM $TN
$0.5
-20%
-30%
$0.0
1998
2001
2004
“The Alternative to Alternatives”
2007
2010
2013
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Why Investors Fell in Love
30%
$2.5
20%
$2.0
10%
$1.5
Hedge Fund Returns
(HFRX)
0%
$1.0
60/40
-10%
AUM $TN
$0.5
-20%
-30%
$0.0
1998
2001
2004
“The Alternative to Alternatives”
2007
2010
2013
13
Investor Profits and Fees 1998-2013
$300
$200
$100
$0
-$100
Est FOF Fees (BNs)
Est HF Fees (BNs)
Real Investor Profits (BNs)
-$200
-$300
-$400
-$500
1998
2001
“The Alternative to Alternatives”
2004
2007
2010
2013
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Investor Profits and Fees 1998-2013
$300
$200
$100
$0
-$100
Est FOF Fees (BNs)
Est HF Fees (BNs)
Real Investor Profits (BNs)
-$200
-$300
-$400
-$500
1998
2001
“The Alternative to Alternatives”
2004
2007
2010
2013
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What Went Wrong?
 Fees
 Transparency
 Size
 Investor Protections
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Why You Run a Hedge Fund
Real Investor Est Total Fees Fees as % of
Total Profits
Profits (BNs)
(BNs)**
AUM
Industry
Share of
Total Profits
Year
Avg AUM
(BNs)
HFRX
1998
$131
13%
$10
$7
6%
$17
44%
1999
$166
27%
$35
$15
9%
$51
30%
2000
$213
14%
$16
$13
6%
$29
44%
2001
$279
9%
$12
$13
5%
$25
52%
2002
$414
5%
$11
$15
4%
$26
58%
2003
$666
13%
$79
$38
6%
$118
33%
2004
$1,027
3%
$9
$32
3%
$42
78%
2005
$1,295
3%
-13
$42
3%
$29
143%
2006
$1,537
9%
$58
$75
5%
$133
56%
2007
$1,925
4%
-$21
$70
4%
$48
144%
2008
$1,797
-23%
-$458
$46
3%
-$412
-11%
2009
$1,506
13%
$193
$37
2%
$230
16%
2010
$1,624
5%
$77
$38
2%
$115
33%
2011
$1,702
-9%
-$158
$40
2%
-$119
-33%
2012
$1,754
4%
$54
$41
2%
$95
43%
2013
$1,978
7%
$125
$45
2%
$170
26%
$30
$566
Total
$596
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Slicing the Pie
1998-2013
Est HF Fees (BNs)**
Est FOF Fees (BNs)
Real Investor Profits (BNs)
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Why Transparency Matters
Bid/Ask Impact with no
Leverage
Bid/Ask Impact with 5X
Leverage
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Costs Aren’t Equally Shared
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Size vs. Returns 1998-2013
30%
20%
10%
0%
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
-10%
-20%
-30%
“The Alternative to Alternatives”
21
Less Transparency Than…
 Public Equities and Debt
 Private Equity
 Real Estate
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Hedge Funds Are Over-Capitalized
$0.3
$0.2
$0.1
$0.0
-$0.1
1998
2000
2002
-$0.2
2004
2006
2008
2010
2012
Returns $TN
-$0.3
-$0.4
7% on $2TN
-$0.5
-$0.6
“The Alternative to Alternatives”
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