The Economist offers an interesting look at two recent books about the hedge fund industry, which together reflect starkly opposing views of the industry.
One book, "The Alpha Masters," profiles 11 of the industry's best-known managers, including all the familiar suspects: John Paulson, James Chanos, Ray Dalio, and so on. The book, written by CNBC journalist Maneet Ahuja, apparently is not a skeptical, hard-nosed journalistic effort but rather borders on hagiography. Throughout her book, Ahuja "seems to be in a trance herself, in thrall to the glamour of her subjects. She never questions the judgment of her alpha-men and always gives them the last word. She devotes dozens of pages to Mr. Paulson's rise in the hedge-fund industry, but glosses over his poor performance in 2011."
Money talks, and this is the treatment that many hedge fund success stories have become accustomed to. If they are spreading their wealth around, they are accorded rock star treatment.
The other book, "The Hedge Fund Mirage," was penned by Simon Lack, a 23 veteran of JPMorgan, where "he grew tired of the free hand that investors all too often gave managers."
Though he was never a journalist, he produced a harder-nosed, skeptical look at the industry and some of its more dubious practices.
"He has written a provocative book questioning a central tenet of the hedge-fund industry: its performance is always worth paying for. The promise of superior performance is wrong, he says. Of course some investors make a killing, but on average hedge funds have underperformed even risk-free Treasury bills. This is because the bulk of investors' capital has flooded in over the past ten years, whereas hedge funds performed best when the industry was smaller than it is now. What is more, it is hard to know how hedge funds actually fare, since indices that track industry performance tend to overstate the returns. Funds that do badly or implode are not usually included in the indices at all."
Funds are discussed in depth. Lack estimates that hedge-fund managers have kept roughly 84 percent of profits generated since 1988, with investors only getting 16 percent. At this point, it is tempting to invoke the Hegelian notion of thesis and antithesis, which give way to synthesis. Both books have their place on the shelf, and both should be taken seriously. If you had to accord one more weight, it would have to be the latter, as skepticism is generally in shorter supply than adulation. -Jim
