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August 09, 2012 1:42 PM It’s Official: Hedge Funds Are a Ripoff

By Ryan Cooper

That’s not to say that there aren’t individually successful hedge fund managers, just that in general hedge funds are a crappy investment whose titanic management fees are in no way justified by their performance. Felix Salmon has the goods:

At the beginning of January, Simon Lack published The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True. It basically does for hedge funds what the Kauffman Foundation did for private equity, and shows that while fund managers can do extremely well for themselves, fund investors would be better off avoiding the asset class entirely…
Baker and the AIMA have in fact now published a 24-page paper entitled “Methodological, mathematical and factual errors in ‘The Hedge Fund Mirage’”, seeking to debunk the book. But a close reading of the paper reveals that there’s much less there than meets the eye.
In fact, the AIMA paper has convinced me of the deep truth of Lack’s book in a way that the book itself never could. Reading a book, it’s often very hard to judge just how reliable the author is, or how cherry-picked the data might be. But if a high-profile hedge-fund industry association spends months putting forward a point-by-point rebuttal, and that rebuttal is utterly underwhelming, then at that point you have to believe that the book has pretty much got things right.

Matt Yglesias concurs. All this is to show that the susceptibility of investors to fads, fashions, and herd behavior, and the allure of those pulling down unthinkable wealth (even if they are, like hedge fund managers, largely parasites), goes all the way to the very top, to those institutional investors moving around tens of billions. As Yglesias says: “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.”

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Ryan Cooper is a National Correspondent at The Week, and a former web editor of the Washington Monthly. Find him on Twitter: @ryanlcooper

Comments

  • Texas Aggie on August 09, 2012 2:30 PM:

    People who dismiss the unemployed and dependent as "parasites" fail to understand economics and parasitism. A successful parasite is one that is not recognized by its host, one that can make its host work for it without appearing as a burden. Such is the ruling class in a capitalist society. - Jason Read

  • c u n d gulag on August 09, 2012 2:43 PM:

    I've got to admit, finding out that these hedge fund parasites are feeding off a whole bunch of trust fund babies, and financial, energy, pharmaceutical, and financial fellow parasitical grifters, kind o' warms the cockles o' mee heart!

    NOW can we charge them same tax rate as the poor working schmucks?

    ROTFLMAO!
    Sorry about that - sometimes I even crack myself up!!!

    Yeah, with campaign contribution money, THAT'LL happen!

    Actually, if these remora eel-like parasites feed off the sharks, I'm more inclined to let them keep their current low tax rate. Call it "The Sucker the Suckers Tax Break!"

  • David Martin on August 09, 2012 2:51 PM:

    Andrew Baker of Aima wrote about his organization's report in the Financial Times on Monday. He considers it a thorough debunking of Lack's "polemic against the industry."

  • T2 on August 09, 2012 3:30 PM:

    off topic - NASA has some new cool photos of Mars....looks just like it does in the Movies...easy to see why its inhabitants would choose to live underground or fly off to some nearby, greener planet and colonize it. I mean, if we can fly there, they can fly here, right?

  • TCinLA on August 09, 2012 3:48 PM:

    Andrew Baker of Aima wrote about his organization's report in the Financial Times on Monday. He considers it a thorough debunking of Lack's "polemic against the industry."

    And you've never seen the C student who thought he was an A student? Watching a moron think he's a genius is pretty damn funny. Of course, someone like you stupid enough to be stupid enough to believe such crap and qualify as a Republican are the D student who thinks the C student's pretty good.

    Hedge funds and gold bugs: proof that there is no connection whatsoever between the brain and the billfold. Surprise surprise, the law of gravity still exists and lead balloons only fly if you throw them off a cliff.

  • Rick B on August 09, 2012 7:36 PM:

    "fads, fashions, herd behavior, and the allure of those pulling down unthinkable wealth"

    An excellent and succinct description of modern free market Black - Scholes finance. It places a veneer of obfuscating mathematics over a cesspool of greed, power-mongering, lying and cronyism.