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The Hedge Fund Mirage

The Illusion of Big Money and Why Its TooGood To Be True

By Simon Lack

THE FALLACY OF HEDGE FUNDS

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If all the money thats ever been invested in HedgeFunds had been put in treasury bil ls instead, the results

would have been twice as good.

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How Have Hedge Fund Investors ReallyDone?

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The Alternative to Alternatives

0%

1%

2%

3%

4%

5%

6%

7%

8%

Hedge Funds Stocks Bonds T Bills

Annual Returns 1998-2013

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The Alternative to Alternatives

-30%

-20%

-10%

0%

10%

20%

30%

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

1998 2000 2002 2004 2006 2008 2010 2012

Returns %

AUM $TN

Hedge Fund Investor Returns and AUM Growth

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The Alternative to Alternatives

-$0.6

-$0.4

-$0.2

$0.0

$0.2

$0.4

$0.6

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

1998 2000 2002 2004 2006 2008 2010 2012

Returns $TN

AUM $TN

Hedge Fund Investor Profits and AUM Growth

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The Alternative to Alternatives

How Hedge Fund Investors Have Done

-30%

-20%

-10%

0%

10%

20%

30%

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

1998 2000 2002 2004 2006 2008 2010 2012

We were better

-$0.6

-$0.4

-$0.2

$0.0

$0.2

$0.4

$0.6

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

1998 2000 2002 2004 2006 2008 2010 2012

when we were smaller

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The Alternative to Alternatives

Why Investors Fell in Love

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

-30%

-20%

-10%

0%

10%

20%

30%

1998 2001 2004 2007 2010 2013

Hedge Fund Returns

(HFRX)

60/40

AUM $TN

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The Alternative to Alternatives

Why Investors Fell in Love

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

-30%

-20%

-10%

0%

10%

20%

30%

1998 2001 2004 2007 2010 2013

Hedge Fund Returns

(HFRX)

60/40

AUM $TN

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The Alternative to Alternatives

-$500

-$400

-$300

-$200

-$100

$0

$100

$200

$300

1998 2001 2004 2007 2010 2013

Est FOF Fees (BNs)

Est HF Fees (BNs)

Real Investor Profits (BNs)

Investor Profits and Fees 1998-2013

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The Alternative to Alternatives

-$500

-$400

-$300

-$200

-$100

$0

$100

$200

$300

1998 2001 2004 2007 2010 2013

Est FOF Fees (BNs)

Est HF Fees (BNs)

Real Investor Profits (BNs)

Investor Profits and Fees 1998-2013

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What Went Wrong?

Fees

Transparency

Size

Investor Protections

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Why You Run a Hedge Fund

YearAvg AUM

(BNs)HFRX

Real InvestorProfits (BNs)

Est Total Fees(BNs)**

Fees as % ofAUM

Total ProfitsIndustryShare of

Total Profi ts

1998 $131 13% $10 $7 6% $17 44%

1999 $166 27% $35 $15 9% $51 30%

2000 $213 14% $16 $13 6% $29 44%2001 $279 9% $12 $13 5% $25 52%

2002 $414 5% $11 $15 4% $26 58%

2003 $666 13% $79 $38 6% $118 33%

2004 $1,027 3% $9 $32 3% $42 78%

2005 $1,295 3% -13 $42 3% $29 143%

2006 $1,537 9% $58 $75 5% $133 56%

2007 $1,925 4% -$21 $70 4% $48 144%

2008 $1,797 -23% -$458 $46 3% -$412 -11%

2009 $1,506 13% $193 $37 2% $230 16%

2010 $1,624 5% $77 $38 2% $115 33%

2011 $1,702 -9% -$158 $40 2% -$119 -33%

2012 $1,754 4% $54 $41 2% $95 43%

2013 $1,978 7% $125 $45 2% $170 26%

Total $30 $566 $596

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Est HF Fees (BNs)**Est FOF Fees (BNs)

Real Investor Profits (BNs)

Slicing the Pie1998-2013

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Bid/Ask Impact with noLeverage

Bid/Ask Impact with noLeverage

Bid/Ask Impact with 5XLeverage

Bid/Ask Impact with 5XLeverage

Why Transparency Matters

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Costs Arent Equally Shared

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The Alternative to Alternatives

Size vs. Returns 1998-2013

-30%

-20%

-10%

0%

10%

20%

30%

$0.0 $0.5 $1.0 $1.5 $2.0 $2.5

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Less Transparency Than

Public Equities and Debt

Private Equity

Real Estate

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The Alternative to Alternatives

Hedge Funds Are Over-Capitalized

-$0.6

-$0.5

-$0.4

-$0.3

-$0.2

-$0.1

$0.0

$0.1

$0.2

$0.3

1998 2000 2002 2004 2006 2008 2010 2012

Returns $TN

7% on $2TN

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