Simon Lack: The hedge fund mirage—the illusion of big money and why it’s too good to be true
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The hedge fund industry has experienced tremendous growth over the past years, climbing from US$131 billion in assets under management in 1998 to US$1.6 trillion in 2010. Hedge funds have attracted investors mainly because of their apparent ability to deliver superior performance.
Simon Lack begins his book The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be Trueby stating that some hedge fund investors did indeed benefit from superior performance, but that many would have been better off investing in risk-free assets. Typically, hedge funds are evaluated based on buy-and-hold returns. Hedge funds do indeed deliver superior performance when looking at buy-and-hold returns. However, buy-and-hold returns are a poor representation of the actual performance of hedge fund investors. Most investors joined hedge funds not at their inception but later in time. In contrast, dollar-weighted returns properly reflect the impact of timing and magnitude of fund flows on...