Hedge Fund Investments. A Valuable Addition to Your Portfolio?

Transcription

1 Hedge Fund Investments A Valuable Addition to Your Portfolio?

2 If everybody was doing active management with hedge funds, and you put together all the hedge funds, what would you get? Treasury bills. Bill Sharpe talks About Asset Allocation, Pricing Theory and Hedge Funds Bloomberg Wealth Manager November 2004 p. 108 William F. Sharpe Stanco 25 Professor of Finance, Emeritus Graduate School of Business, Stanford University Nobel laureate 1990

3 We conclude that hedge funds are far riskier and provide much lower returns than is commonly supposed. Burton G. Malkiel and Atanu Saha, Hedge Funds: Risk and Return Financial Analysts Journal November/December 2005 Burton G. Malkiel Chemical Bank Chairman s Professor of Economics Princeton University

4 Our research has shown that in at least eighty per cent of cases the after-fee alpha for hedge funds is negative I m not saying they don t have skill; I m just saying they don t have enough skill to make up for two and twenty. Harry M. Kat Professor of Risk Management Director of Alternative investment Research Centre Cass School of Business City University, London John Cassidy, Hedge Clipping New Yorker July 2, 2007

5 The risks facing hedge funds are nonlinear and more complex than those facing traditional asset classes such risk are currently not widely appreciated or well understood. Nicholas Chan, Mila Getmansky, Shane M. Haas, and Andrew W. Lo, Do Hedge Funds Increase Systemic Risk? Economic Review Federal Reserve Bank of Atlanta Fourth Quarter 2006 Andrew W. Lo Harris and Harris Group Professor Director of MIT Financial Engineering Laboratory MIT Sloan School of Management

6 David F. Swensen Chief Investment Officer, Yale University On top of the enormous difficulties of identifying a group of genuinely skilled investment managers and overcoming the obstacles of extremely rich fee arrangements investors confront a fundamental misalignment of interests created by the option-like payoff embedded in most hedge fund fee arrangements. Investors in hedge funds find generating risk-adjusted excess returns nearly an impossible task. David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment 2005 p. 133

7 Wall Street Journal October 30, 1997 The indications are that the entire equity positions of the funds have been wiped out.

8 The fund had racked up returns of more than 40% per year, with no losing stretches, no volatility, seemingly no risk at all. -- Roger Lowenstein, When Genius Failed 2000 p.xix

9 Wall Street Journal April 3, 2000 It got too big, too exposed to withdrawals from hot-money investors and too leveraged.

10 Wall Street Journal October 21, 2002 One of the biggest hedge-fund managers in the bond business has told investors that it had losses of more than 50% in recent months...

11 Business Week October 9, 2002 The hit to Lipper s $4 billion empire was so great it would eventually force the 16-year old firm under.

12 Wall Street Journal January 8, 2003 Gotham s sudden change of fortune, and the still-murky cause of its unraveling, highlight yet again the perils of hedge fund investing.

13 Wall Street Journal January 24, 2003 It rose 18% in 2001, and then rocketed 76% in 2002.

14 Business Week May 10, 2004

15 Wall Street Journal July 15, 2004 It only takes one bad year to put most hedge funds in peril.

16 Wall Street Journal June 21, losses of nearly 25% this year on mistaken bets on both U.S. and European stocks.

17 Wall Street Journal September 30, 2005

18 Wall Street Journal February 18, 2006 About 500 investors fear they have lost everything. Ian McDonald, Troubles at Atlanta Hedge Fund Snare Doctors, Football Players Wall Street Journal March 9, 2006

19 Wall Street Journal August 22, 2006 Lawsuits filed in recent months in New York state court.

20 Wall Street Journal August 31, 2006 Ritchie is asking investors to curtail their withdrawals, worried about forced selling and other potential problems.

21 Wall Street Journal September 12, 2006

22 Wall Street Journal May 29, 2007 The firm s largest investment fund is down 24% in the past year.

23 Financial Times August 30, 2007 Basis had secured a solid reputation, helped by top ratings from fund assessment agencies, including Standard & Poor s.

24 Wall Street Journal September 19, 2007 Mr. Hunter lost roughly $5 billion in about a week.

25 Wall Street Journal September 15, 2007 Over the past 12 months the fund has lost 37% of its value.

26 Business Week October 22, 2007 The funds collapse wiped out $1.6 billion in investor equity

27 Wall Street Journal October 27, 2007 In early July, Sowood Capital Management LP had been grinding out steady, if unspectacular, gains By the end of July, Sowood was out of business. Its investors lost more than half their money.