I spent an interesting morning yesterday at the AR Symposium, a well-organized get together of hedge fund industry professionals. I had been asked to chair a panel titled “What do investors want and how do they want it”. A year ago I wrote an article pointing out that hedge fund investors in aggregate would have done better investing all their money in t-bills rather than hedge funds. It’s a controversial statement though not hard to prove and to my knowledge no one in the industry has since disputed it. The article was one of the most read on AR’s online site, and it served as the inspiration for my book, The Hedge Fund Mirage, available at the end of the year.

It’s not that I’m against hedge funds. There are many fantastically talented managers, and hedge funds have made enormous amounts of money. It’s just that the money hasn’t really made it through to the clients, in aggregate. I think hedge fund investors ought to do better than they have. I am pro-investor, not anti hedge fund. But not every hedge fund professional initially interprets my message in this way.

So I shared the stage with four charming and well-informed hedge fund investors yesterday. They deftly handled my mildly provocative questions, such as, “Since hedge fund investors have in aggregate not made money, what should they do differently?” Several useful suggestions were offered. I followed up with, “If hedge funds are to meet investors’ 7% return assumptions, this $2 trillion industry needs to generate $140 BN in profits annually, something they’ve never done (apart from the 2009 bounce back following 450 BN in ’08 losses). Why shouldn’t investors be concerned that the industry is overcapitalized?” This one was a little harder but the panel was up to the challenge and offered rebuttals. However, I do think this may continue to be a problem. And 2011 likely represents the 9th consecutive year that hedge funds have failed to outperform a simple blend of 60% stocks/40% bonds. The hedge fund faithful will continue to face such challenges, but most will persevere and new entrants will continue to arrive on the scene.

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