Dude, Where's My Hedge?

A Maze of Fees and Gates

A Maze of Fees and Gates

This morning, Bloomberg has an article about how hedge fund managers are no longer in the driver’s seat when dealing with clients.  They are now flying to visit with their accounts when they used to force them to come to Connecticut.  They are adjusting fees downward to keep assets from CALPERS and other large investors.  They are even wearing neckties.  Welcome to the Real World of earning it, boys.

From Bloomberg:
“For a while there, managers forgot that it was our money,” said Brad Alford, head of Alpha Capital Management LLC in Atlanta, which selects hedge funds for clients. “Now investors are fighting back.”

Let me get this straight…

Here’s the pitch…put your money in my hedge fund, and in return:

  • You may or may not be able to get your money out when you want it or need it
  • Your cash will be pooled with everyone else’s
  • You assets may become frozen depending on what happens to our prime brokerage
  • We reserve the contractual right to “gate” redemptions and hold you in due to market conditions
  • We are under no obligations to discuss or disclose any of the investments we make on your behalf
  • We will charge 2% on whatever you put in, regardless of the returns or losses, as a management fee
  • We will also take at least 20% of whatever profits there are as a performance fee
  • If the fund goes south and it looks like we won’t earn a performance fee for the year, we will close up shop and start a new fund by simply changing the name and marketing materials

But here’s the best part:

For all of these restrictions and fees and costs, if my fund does what the average hedge fund did in 2008, for example, you will be down 19%.  But we beat the S&P!

…managers lost an average of 19 percent, according to data compiled by Hedge Fund Research Inc., the most since the Chicago-based firm started tracking the industry in 1990.

No wonder the hedge fund industry had 37% of its assets yanked last year.  Most of them just don’t hedge anything!

There are only a handful of managers who actually did hedge or profit from the market volatility last year.  Certainly not enough to justify the $2 trillion in assets they ended ’07 with.  Certainly not enough to support a world with 8000 or even 3000 individual hedge funds.

At the same time, some managers limited investors’ ability to take money out. More than 18 percent of all hedge-fund assets, managed by 5 percent of firms, were subject to some sort of withdrawal restriction last year.

Just imagine calling your broker, asking for your cash out of an ETF or Index Fund and being told “No Way, Jose.”  I guess that’s a privilege that only the high net worth hedge fund clients can enjoy.  Have fun with that!

Full Story:  Hedge Fund Clients Angry (Bloomberg)

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