My Yahoo!Look at some of the charlatans who have invaded the field. The secretive nature of hedge funds makes them enticing vehicles for con artists. For instance, after the SEC suspended him in 1993, Michael Smirlock, a former GoldmanSachs mortgage trader, raised $700 million to start three hedge funds. Last December he again fell afoul of the SEC, which sued him for hiding $70 million in losses from his investors.
The obituary list of hedge funds should give pause to anyone imagining that all these contraptions are bound for glory. Bad bets blew a hole in Streisand's fund, BKP Partners, in mid-1998. She was party to a class-action suit against Robert K. Pryt, its manager, and his onetime $270 million fund, finally striking a settlement for 1% to 2% of investors' initial outlays. Bianca Jagger was in the $13 million Porpoise Fund when it went down, also in 1998. Rick Yune, the hot young movie actor (The Fast and the Furious), himself used to be a Wall Street trader; still, he lost money in three hedge funds and now is out of them entirely.
The unhappy truth is many hedge funds (just like mutual funds) can't deliver on their promise of beating the broader stock market over the long haul. During the last five years (through May 2001), the S&P 500 returned an annual 15%. Nine of the ten weight-averaged classes of hedge funds monitored by CSFB Tremont delivered sub-S&P returns, after fees. Over ten years hedge funds look even worse. According to MarHedge, another hedge-fund tracker, of its 14 major hedge fund categories only 1, Global Established Markets, beat the S&P's 18% return from 1990 through the middle of last year, and it did so only by a rounding margin.
Even worse news: These system-wide figures are too kind to hedge funds. Their managers have no obligation to report returns to the SEC. This business has no Morningstar or Lipper; hedge-fund trackers cover just a portion of the business. If hedge-fund operators don't feel like answering a survey during a bad quarter, they don't. In 2000's first quarter 573 hedge funds reported to MarHedge; by year-end 167 of them, nearly a third, were missing in action.
Not all hedge fund managers are crooks or duffers, however. Ask your financial adviser to recommend some, and then read the fine print very carefully. FORBES GLOBAL has profiled a couple of hedge fund stars: Roger Guy of Gartmore in London (Mar. 19) and Scobie Ward of Ward Ferry Management in Hong Kong (June 11). Sure, there are plenty of bad hedge funds. Just make sure that you don't own a piece of one.
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