The Investment Scientist

Posts Tagged ‘funds of funds

Is this your fund manager?

Is this your fund manager?

Securities and Exchange Commission Chairman Mary Jo White supports a new rule that would allow hedge funds to market directly to the public. I think that’s a fantastic idea. Let me explain why.

Between 1998 and 2010, hedge fund managers earned “only” $379 billion in fees. Do you know how much they made for investors?

Before you answer that question, you should be aware that one-third of hedge fund money is channeled through funds of funds. Their managers need their cut too. Between 1998 and 2010, their take was about $61 billion.

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Hedge funds are often peddled as a unique asset class that has outstanding returns that are uncorrelated with the market. In reality, hedge funds are as much an asset class as Las Vegas is.

Hedge funds are a general description of private investment companies that are organized as limited partnerships with fund managers as the general partners and investors as limited partners. The keyword here is private. By law they are not supposed to be sold to the public; therefore, they are exempted from government oversight. But sold to the public they are! It is not the first time unscrupulous “financial advisors” have pushed the limit of the law, while the SEC looks the other way.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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