Rewards for failure – FT.com

Wow!

What this means is that many of the investors who have been paying hefty fees to top hedge fund managers would have done much better had they simply shoved all their money into risk-free short-term government securities, even though these returned just 2.3 per cent a year between 1998 and 2010.

This may come as a surprise to those who follow the published hedge fund indices, which show annual returns averaging between 7 and 8 per cent over the same period. But, as Lack explains, these deceive to flatter. That is because they do not take into account the growth in the total value of assets that hedge funds manage – a calculation known as “money weighting”. To understand how this changes the picture, consider what happened to cumulative returns when markets crashed in 2008. Because more and more people had poured money into hedge funds over the preceding decade – assets under management increased from $143bn to $2.1tn – the $450bn-odd vaporised in that single year, Lack maintains, probably “destroyed all the value that hedge funds [had] ever created”.

via Rewards for failure – FT.com.

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