The Hedge Fund Mirage: The Illusion of Big Money and Why Its Too Good to Be True

Praise for The HEDGE FUND MIRAGE

"We all know of hedge funds that vaulted to the sky, only to crash to earth. Simon Lack demonstrates, astonishingly, that the industry itself has repeated that dismal story of early promise, followed by an infusion of funds, followed by a numbing reversion to the mean. The upshot: for the average investor in the average fund, hedge funds have proved a false hope. And Lack has the numbers to prove it. Written by a canny industry insider, The Hedge Fund Mirage takes a fresh look at an industry that is too often viewed in reverent and adoring terms. Not least, Lack draws attention to the fact that the average hedge fund manager in terms of their sky–high fees has done far better than the average investor. This book will give investors the tools to evaluate whether their own fund is up to the mark."
Roger Lowenstein, author, When Genius Failed

"The Hedge Fund Mirage is required reading for hedge fund investors. Mr. Lack′s wealth of experience combined with his deep commitment to candid, even–handed dialogue provides a truly unique and important perspective on the hedge fund industry. In a world where published hedge fund research typically relies on unreliable, difficult to validate data, or second–hand accounts culled from public media, Mr. Lack has created a highly entertaining book with firsthand, insightful analysis that will serve to rapidly move the reader up the learning curve."
Andrew Weisman, Chief Executive Officer, WR Platform Advisors LP

"Simon Lack makes a critically important distinction between time–weighted returns and dollar–weighted returns generally, and specifically how they can differ significantly in the hedge fund space. Based on his extensive experience, the book is a treasure of subtle as well as not–so–subtle cautions, considerations, and advice which every hedge fund investor should comprehend."
Michael Hennessy, cofounder, Morgan Creek Capital Management

"Controversial and enlightening, Simon Lack delivers the real deal on alternative asset investing. Caveat emptor to those who fail to read this, whether you′re a hedge fund manager, private investor, or journalist."
Lesley Daniels Webster, Principal, Daniels Webster Capital Advisors, retired EVP, JPMorgan Chase

"Simon′s wisdom, humor, and authoritative analysis jump boldly off of every page. Anyone who has ever invested in a hedge fund or is thinking about it should read this book."
John Trammell, hedge fund investor, CEO, Cadogan Management

Introduction 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

SIMON LACK has spent his entire career in trading and hedge fund investing. After twenty–three years with JPMorgan, he founded SL Advisors, LLC, a Registered Investment Advisor, in 2009. Much of Lack′s career with JPMorgan was spent in North American fixed income derivatives and forward FX trading, a business that he ran successfully through several bank mergers, ultimately overseeing fifty professionals and $300 million in annual revenues. He sat on JPMorgan′s investment committee which allocated over $1 billion to hedge fund managers and founded the JPMorgan Incubator Funds, two private equity vehicles that establish economic stakes for emerging hedge fund managers. Lack′s financial markets experience dates back to 1980 when he began his career on the floor of the London Stock Exchange.

"Simon Lack, a hedge fund veteran exposes some unforeseen and uncomfortable truths about the industry in his new book." (Hedge Fund Net, January 2012)

"...a cautionary tale from one who knows just about all the tricks...an easy, largely fun and certainly instructive read" (Financial World, February 2012)

"Devastating little book.... His conclusions will make uncomfortable reading for many self–styled ′masters of the universe′.... This book should be required reading for pension fund trustees." (Jonathan Ford, Financial Times, 19th February 2012)