The dismal truth about hedge funds and how investors can get a greater share of the profits Shocking but true: if all the money that's ever been invested in hedge funds had been in treasury bills, the results would have been twice as good. Although hedge fund managers have earned some great fortunes, investors as a group have done quite poorly, particularly in recent years. Plagued by high fees, complex legal structures, poor disclosure, and return chasing, investors confront surprisingly meager results. Drawing on an insider's view of industry growth during the 1990s, a time when hedge fund investors did well in part because there were relatively few of them, The Hedge Fund Mirage chronicles the early days of hedge fund investing before institutions got into the game and goes on to describe the seeding business, a specialized area in which investors provide venture capital-type funding to promising but undiscovered hedge funds. Today's investors need to do better, and this book highlights the many subtle and not-so-subtle ways that the returns and risks are biased in favor of the hedge fund manager, and how investors and allocators can redress the imbalance.* The surprising frequency of fraud, highlighted with several examples that the author was able to avoid through solid due diligence, industry contacts, and some luck* Why new and emerging hedge fund managers are where generally better returns are to be found, because most capital invested is steered towards apparently safer but less profitable large, established funds rather than smaller managers that evoke the more profitable 1990s Hedge fund investors have had it hard in recent years, but The Hedge Fund Mirage is here to change that, by turning the tables on conventional wisdom and putting the hedge fund investor back on top.
ntroduction xi Acknowledgments xv Chapter 1 The Truth about Hedge Fund Returns 1 How to Look at Returns 2 Digging into the Numbers 3 The Investor's View of Returns 6 How the Hedge Fund Industry Grew 10 The Only Thing That Counts Is Total Profits 13 Hedge Funds Are not Mutual Funds 14 Summary 16 Chapter 2 The Golden Age of Hedge Funds 19 Hedge Funds as Clients 20 Building a Hedge Fund Portfolio 22 The Interview Is the Investment Research 24 Long Term Capital Management 27 Too Many Bank Mergers 30 Summary 33 Chapter 3 The Seeding Business 35 How a Venture Capitalist Looks at Hedge Funds 36 From Concept to the Real Deal 38 Searching for That Rare Gem 41 Everybody Has a Story 46 Some Things Shouldn't Be Hedged 50 The Hedge Fund as a Business 52 Summary 56 Chapter 4 Where Are the Customers' Yachts? 59 How Much Profi t Is There Really? 60 Investors Jump In 63 Fees on Top of More Fees 65 Drilling Down by Strategy 69 How to Become Richer Than Your Clients 74 Summary 77 Chapter 5 2008-The Year Hedge Funds Broke Their Promise to Investors 79 Financial Crisis, 1987 Version 80 How 2008 Redefi ned Risk 82 The Hedge Fund as Hotel California 85 Timing and Tragedy 93 In 2008, Down Was a Long Way 97 Summary 98 Chapter 6 The Unseen Costs of Admission 99 How Some Investors Pay for Others 101 My Mid-Market or Yours? 104 The Benefi ts of Keen Eyesight 107 Show Me My Money 111 Summary 115 Chapter 7 The Hidden Costs of Being Partners 117 Limited Partners, Limited Rights 118 Friends with no Benefi ts 120 Watching the Legal Costs 125 Summary 128 Chapter 8 Hedge Fund Fraud 129 More Crooks Than You Think 130 Madoff 133 Know Your Audience 134 Accounting Arbitrage 101 136 Checking the Background Check 138 Politically Connected and Crooked? 140 Paying Your Bills with Their Money 141 Why It's Hard to Invest in Russia 143 After Hours Due Diligence 145 Summary 146 Chapter 9 Why Less Can Be More with Hedge Funds 149 There Are Still Winners 151 Avoid the Crowds 154 Why Size Matters 158 Where Will They Invest All This Money? 166 Summary 168 Afterword 171 Bibliography 177 About the Author 181 Index 183
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