Insider ‘blows lid off’ the hedge fund world

Simon Lack’s new book, The Hedge Fund Miracle, claims to “blow the lid off” the secret world of hedge funds, where little or no regulation, excessive fees and a crowded industry have left investors with poor returns.

His central claim is this: “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.”

Treasury bills are US Government-backed short-term debt obligations with a maturity of less than a year.

Hedge funds typically take short positions in stocks they believe are over-priced and long positions in companies that they consider under-valued. UK backers include large pension funds, insurance companies and other institutional investors.

Mr Lack looked at the internal rate of return of the industry and came to the conclusion that it is “pathetic”. He asserts that risks and returns are biased in favour of managers.

Mr Lack told the Yorkshire Post: “The obvious financial success of so many hedge fund managers has created the presumption of successful clients. But investors haven’t run the numbers.”

In the book, he writes: “While the hedge fund industry has created some fabulous wealth, most investors have shared in this to a surprisingly modest extent.

“I tried to think of anyone who had become rich by being a hedge fund investor – other than the hedge fund managers themselves – and I couldn’t.”

But he does not blame fund managers, the best of whom “are without doubt highly talented”.

Instead, he said that “if there is a fault it lies squarely with many supposedly sophisticated investors who have applied far less critical analysis and cynicism to their allocation decisions”.

Mr Lack said investors should insist on keeping more of the winnings that are generated using their capital.

The Alternative Investment Management Association Limited (AIMA), which represents the hedge fund industry, trashed the book. A spokesman claimed that the work is riddled with errors and the central claim that treasuries have outperformed hedge funds is “simply wrong”.

n The Hedge Fund Miracle, The Illusion of Big Money and Why It’s Too Good To Be True, is published by Wiley.