The Hedge Fund Mirage: Q&A with Simon Lack

Abstract

In his 2012 book, The Hedge Fund Mirage, author and investment industry veteran Simon Lack argued that since the late ‘90s:

• While hedge fund industry assets grew from under $200 million to more than $2 trillion, hedge fund returns had not kept pace with Treasury Bills. • Over this period, hedge fund fees totaled about $566 billion in aggregate vs. roughly $30 billion in actual profits for hedge fund investors. • Limited transparency on hedge fund philosophies, processes and holdings made it difficult for investors to accurately assess a growing range of offerings. • Despite these issues, hedge funds could still have a place in portfolios; but investors needed to be thoughtful about hedge fund managers and allocations.

Just after it was published in 2012, some industry experts and members of the financial press questioned Lack’s methodology and results and sought to dismiss his findings. In May 2014, Lack presented his work at the CFA Institute Conference in Seattle where Brandes Institute Advisory Board member Bruce Grantier talked with him.

Grantier recently published a review of Lack’s presentation at InvestorLiterature.com (available to subscribers). Grantier also helped arrange for the Brandes Institute to question Lack via email. Here, we share excerpts from that email exchange.

Keywords: hedge fund, portfolio management, asset allocation, Simon Lack

JEL Classification: G11, G22, G23, G31, G10, G14, G20, G30