Why do I think that investors in hedge funds should think twice?  Well, one of the key issues is that hedge fund managers typically take a large profit share (say 20%) in the good years, but don’t take a share of the lossses that arise in other years.  So they tend to like big swings in annual returns.  The effects of this lack of symmetry on investor return can be remarkable over the long run (just as the lack of symmetry in bonus systems for bank executives has had a predictably disastrous effect on the wealth of bank shareholders in recent years).  

By way of illustration of the sweet deal that hedge fund managers arrange for themselves, in the FT “Money” section on 20th June 2009, one of my favourite economic writers, John Kay, has this nugget:      Read the rest of this entry »