Book Review: The Hedge Fund Mirage [updated]

The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True is an  account of where the money is made in hedge funds and a series of anecdotes about exactly how many different ways everything can go wrong.

Author, Simon Lack, combines easy reading prose with sufficiently crisp examples to make his points clearly. His time at JPMorgan included a stint evaluating hedge fund managers and their performance, focusing on snagging a share of the fees the managers earn rather than the performance the investors eek out.

His main contention is that from 1998 to 2010, investors would have done better to invest in T-Bills than hedge funds – a truly alarming claim.  I didn’t recalculate his numbers and I’ve heard a few disagree with them [Update, many disagree with some convincing arguments on technical errors. I don’t agree with all the criticisms, but there are enough valid concerns to mean you should take this book with a pinch of salt  aima_research_committee_paper_-_methodological_mathematical_and_factual_errors_in_the_hedge_fund_mirage_-_august_2012]  . However, he backs up this numerical result with a list of the ways in which hedge fund managers can get things wrong. Everything from outright fraud to disingenuous legal contracts and on to greed-induced cumbersome fund sizes.

I’ve read plenty of academic papers before demonstrating how difficult it is to trust hedge fund performance figures (the author touches on these too) but this is the first time I understood the potential practical extent of the problem.

If you’re invested in hedge funds or considering investing in hedge funds, read the book. It’s engaging and will at least prep you with some better questions to ask. At most, it may put you back into a traditional investment vehicle instead.


Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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