December 22, 2006
Hedge Funds Fail The Returns V/s Fees Test
Now this is definitely not ‘news’ news. I mean if anybody actually went “Wow!” when they heard that hedge fund returns don’t justify their fees, the only reason would be that s/he’s been out in the woods for a very long time. The fact that hedge funds charge too high fees and earn modest investment returns is a well-known fact. What I’d like to know is what the industry and investors plan to do to rectify this issue.
According to industry executives there is a problem of plenty in the hedge fund industry. These hedge funds get paid outrageous amounts of money to produce mediocre returns. Most hedge fund managers don’t even clearly articulate a strategy to clients. They just expect clients to lap up whatever they offer.
Industry estimates show that there are around 9,000 hedge funds controlling up to $1.7 trillion of assets. These funds typically charge 1 to 2 percent management fees and up to 20 percent performance fees. This is much more than that charged by traditional mutual funds.
Data collected for 2005 shows that the average return for all hedge funds was about 7.6 percent. This compares unfavorably with the 10 percent rise in global stock market returns. Pension plans and other investors have been pouring money into hedge funds, swelling the market and diluting many funds' returns. As a result, more funds are likely to disappoint investors by making only single-digit percentage returns in future years.
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