August 30, 2012
Hedge Funds should not be allowed to advertise. The odds are already stacked against the individual investor. High Fee mutual funds are problematic enough, but the compensation structure of hedge funds is nothing short of insane. Fund of Funds can have a 4% ER and 20% on high water.
Their compensation structure incentivizes fund managers to take outsized risks. They only need one big score. It's a short term game for them. Just look at John Paulson. He's done, but his customers are not. For them, it's a high risk, low reward, general bad deal.
People will chase performance and the economic damage will be massive because high risk payouts seldom occur in pairs. Repeat performance is rare...yet... the big money flows happen after a risk strategy has already paid off. Most people will get stuck with a bad investment. This is true and obvious simply by observing mutual fund flows. Yet, this is much more dangerous because long-only strategies are actually less risky than "anything goes" investment platter. It's nothing short of lambs to the slaughter.
Isn't this obvious?
Please protect us. We need all the help we can get.