Why Hedge Funds Destroy Investor Wealth

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.  So claims Simon Lack – a former JPMorgan executive whose job was once to help steer billions into hedge funds – in his recent book, The Hedge Fund Mirage: The Illusion of Big Money and Why It's Too Good to Be True.

You’d think hedge fund advocates would immediately pounce on this and refute it; but it’s irrefutable.

Even Andrew Baker, the chief executive of the hedge fund lobbying organization, the Alternative Investment Management Association (AIMA), could come up with only a lame rebuttal – arguing, essentially, without solid evidence, that the same analysis would show that investments in other asset classes do just as badly, because similarly dumb, trend-following investors invest in them just as they invest in hedge funds.

Why, then, will so few investors actually believe Lack’s conclusion, and act on it? And why do wealthy, supposedly savvy individual investors keep wasting their money on hedge funds, and – worse still – why do institutional investors like public pension funds, abetted by irresponsible consultants, continue squandering the middle class retirement assets that they oversee to make hedge fund managers phenomenally rich?

Perhaps part of the answer lies in this quote from Lack’s book:

When I first moved to the United States in 1982 I noticed a subtle difference in attitudes toward wealth between Europeans and Americans. In Britain, an accountant/doctor/lawyer parking his S-Class Mercedes would cause onlookers to comment disapprovingly at how he must be ripping off his clients in order to afford such a car. In America, the same scene would cause most to conclude that the individual must be successful and therefore worth doing business with! Although hedge funds and their investors are global, the American attitude toward wealth, to staying close to winners, has prevailed, as with so many American values.

When I interviewed Mr. Lack before writing this review, and remarked upon this statement, his reaction was interesting. A Briton transplanted to the US, he found Americans’ upbeat outlook rather refreshing – he was a little tired, I gathered, of the British suspicion of wealth.

It’s fine to admire those who accumulate great wealth and not be suspicious of them; but, be that as it may, to try to stay close to them at the cost of your own wealth, and to the detriment of those who have entrusted their wealth to you, is taking things too far.