THE FALLACY OF HEDGE FUNDS

The Hedge Fund Mirage

The Illusion of Big Money and Why Its Too
Good To Be True

By Simon Lack

If all the money thats ever been invested in Hedge

Funds had been put in treasury bills instead, the results
would have been twice as good.

How Have Hedge Fund Investors Really

Done?

Annual Returns 1998-2013

8%
7%
6%
5%
4%
3%
2%
1%
0%
Hedge Funds

The Alternative to Alternatives

Stocks

Bonds

T Bills

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

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

11

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

12

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

14

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

15

What Went Wrong?

Fees
Transparency
Size
Investor Protections

16

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

17

Slicing the Pie

1998-2013

Est HF Fees (BNs)**

Est FOF Fees (BNs)
Real Investor Profits (BNs)

18

Why Transparency Matters

Bid/Ask Impact with no
Leverage

Bid/Ask Impact with 5X

Leverage

19

Costs Arent Equally Shared

20

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

22

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

23

24