The Investment Scientist

Why you should avoid hedge funds

Posted on: August 15, 2012

Hedge fund managers take their cut

There is a new book about the hedge fund “industry” by former insider Simon Lack. Its title says it all – The Hedge Fund Mirage – The Lesson of Big Money and Why It’s Too Good To Be True.

Not everybody has time to read books like this, but if you are ever approached by a hedge fund peddler – I get calls every week about an amazing alternative investment opportunity – at least look at the table below before you part with your money.

Between 1998 and 2010, hedge fund fees totaled $440 billion versus $9 billion total profits for investors.

This result does not even take into account survivorship and reporting bias. Since hedge fund performance reporting is voluntary, the data are bound to be missing hedge funds with bad returns and hedge funds going out of business.

By the author’s estimate, if these biases are accounted for, investors actually lost $308 billion in hedge funds, while the industry made $324 billion in fees.

Hedge funds and funds of funds are a giant wealth transfer scheme from ordinary investors to filthy rich hedge fund managers.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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