Conclusion: Should Anyone but Yale Invest in Hedge Funds?

We got them steadily depressin', low-down mind messin', workin' at the hedge fund blues.

—With apologies to the late Jim Croce

David Swensen, as almost everyone knows, is the extraordinarily successful manager of the Yale University endowment. In Swensen's first book, Pioneering Portfolio Management,24 published in 2000 and addressed to institutional investors, hedge funds were portrayed as playing an essential role in reducing portfolio risk and in gaining access to the most talented managers. So it's no surprise that Yale has a big exposure to hedge funds.25

But in Swensen's second book hedge funds seemed to have disappeared from the face of the earth. In Unconventional Success,26 addressed this time to the individual investor, Swensen mentions hedge funds only in passing, mainly complaining about their fees. What gives?

Obviously enough, the first decade of the twenty-first century has been a rough one for the hedge fund industry. Returns have been disappointing, at least compared to what investors were expecting (and compared to what many hedge fund managers were projecting). The Securities and Exchange Commission (SEC) has decided to get tough on hedge funds, forcing them to choose between registering with the SEC or imposing long lockups on their investors. A steady stream of frauds and blowups have occurred in the industry—Bernard Madoff being Exhibit A—giving everyone a black eye.

I yield to no one in my skepticism ...

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