Hedge Fund Mirage

The highly respected magazine The Economist, printed an article on hedge-fund returns earlier this year. Guess what? They are horrible.  Thus, the name of the article is "Rich Managers, Poor Clients." The Economist article is based on a book called The Hedge Fund Mirage: The Illusion of Big Money and Why It's Too Good to Be True.

Oh, hedge fund managers are indeed brilliant - they are masters at identifying inefficiencies in the market and taking advantage of the uninformed patsies.  Unfortunately, the most uninformed patsies seem to be the clients of the hedge funds themselves!  You see, while the hedge fund industry has made the hedge fund managers wealthy beyond belief, their clients have enjoyed a 14 year annualized return of about 2.1% or about half what you could earn investing in riskless treasury bills!

How can this be?  Every pension fund and endowment in America is piling into hedge funds.  How can the returns be so horrible?  Brace yourself, I'm going to use 3rd or maybe 4th grade math to explain the obvious problem with hedge funds.  What I'm about to tell you was not in The Economist article. Ok, are you ready?