The Truth about Hedge Funds
From Misunderstood Investment Vehicle to Household Word
f you read the business press, watched television, or eavesdropped on a congressional finance committee hearing at almost any point since 1999, but especially in 2008, you might define hedge funds in several ways:
• Mysterious, secretive, risky pools of capital managed by swashbuckling, cowboy investment managers.
• Lying, thieving, Ponzi-scheming criminals.
• The cause of the whole breakdown of the financial system.
Alexander Ineichen, a leading research analyst and author, has said, “The reputation of hedge funds is not particularly good. The term ‘hedge fund’ suffers from a similar fate as ‘derivatives’ due to a mixture of myth, misrepresentation, negative press, and high-profile casualties.”1
Ineichen made a similar observation in another publication: “There is still a lot of mythology with respect to hedge funds. Much of it is built on anecdotal evidence, oversimplification, myopia, or simply a misrepresentation of facts.”
But in that instance, he asserted a hedge fund definition that is simpler and more germane to serious, sophisticated investors: “Hedge fund managers are simply asset managers utilising other strategies than those used by relative return long-only managers.”2
While the term hedge fund
is used broadly, it is often used to describe a vehicle with a 1 and 20 fee structure. In our book Foundation and Endowment Investing
, we summarized hedge funds as follows: