Gaming the System: Are Hedge Fund Managers Talented, or Just Good at Fooling Investors?

http://knowledge.wharton.upenn.edu/article.cfm?articleid=1931&jsessionid=9a3077a90249657e225f

Knowledge@Wharton, reports that new research argues it is easy for hedge funds to fool investors into believing their managers are more capable than they actually are. This makes it difficult for investors to distinguish between good managers and bad ones. According to Wharton, investing in a hedge fund is similar to buying a “lemon” — a used car with hidden problems. One way hedge funds can appear to encourage good performance and keep managers’ interests in line with investors’ is to load management contracts with incentives. But the paper notes that, in practice, there is no way to encourage excellence without

http://www.bloomberg.com/apps/news?pid=20601087&sid=a.mAziH67xTI&refer=home

It's obvious that hedgefund managers are not all that they are cracked up to be. Yes, they can stave off losses, but fundamentally they are unrelgulated, unruly and uncontrollable by investors. They aren't very successful either in this bear market. Hedge funds with larger amounts of debt and “more complex investments” are the most likely to face higher insurance costs because it’s typically harder for investors to withdraw their money from those funds.

Even the insurance companies who used to underwrite investments are charging significantly higher premiums because they simply do not know what is happening behind those closed doors and how money is being made in those complicated formulations governing hedge funds. The SEC has been filing record number of settlements with funds that go bust.

Sounds like a bunch of small Bernie Madoffs!

"New York-based AIG and London-based Brit Insurance declined to comment on changes to premiums. Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices, and participate substantially in profits from money invested."