• @DavidSchawel Shrink the balance sheets then for true profit; sell AFS assets, & use proceeds to buy back debt. Makes BalSht cleaner also $$ Jan 13, 2012
• Could protectionism, tariffs, & a VAT lead 2 inflation? RT @historysquared: $$ : Latest in the Ongoing Global Trade War http://t.co/QuwgmmxO Jan 13, 2012
• The value of free enterprise has nothing to do with money or wealth http://t.co/mPHesBRu right 2 “life, liberty, &the pursuit of happiness.” Jan 13, 2012
• The lure to leave the euro may prove irresistible http://t.co/upM8V9Hd Better to be Argentina than Latvia. Still better to be the US! $$ Jan 13, 2012
• Amid downturn, more older Americans employed than ever before http://t.co/BBCCUy0A Retirement will be considered abnormal in the future $$ Jan 13, 2012
• Americans Clueless, Pay Wall Street $20 Billion for Bad Swaps http://t.co/hCIZwSeY Swaps weren’t problem, Auction rate preferreds were $$ Jan 13, 2012
• Accounting Quirk Lurks as Wild Card in Banks’ Earnings http://t.co/yfiwHRVs Acctg is best when mkt-based or amortizd cost, not hybrid $$ Jan 13, 2012
• Little Alarm Shown at Fed At Dawn of Housing Bust http://t.co/HU4b513h FOMC transcripts always highlight how clueless the FOMC is. $$ Jan 13, 2012
• Fed’s Steps Toward Transparency May Hinder Effort http://t.co/14hSqGs6 With increased data mkts unpredictably wind tighter to Fed policy $$ Jan 13, 2012
• Here’s something to consider: http://t.co/63fsJc2y The last time ICI updated the FAQ on fund flow… http://t.co/G5XJr24E Jan 13, 2012

In 2003 a financial gun was put to my head, telling me to relocate or be severed.  I took severance because of all the ties my family had to the area.  I landed at a hedge fund near me, one well enough run to be immune to the criticisms of this book.

The first thing you have to understand is that corporate form is not a factor in performance.  It does not matter whether you manage a mutual fund, unit investment trust, hedge fund — what matters are your ideas, not the legal form you inhabit.

But, some of the problems with hedge funds, as a opposed to open-end mutual funds, is that:

1) Many hedge funds go out of business, and as they do, their bad performance is not recorded, and sometimes lost.

2) Hedge funds with good performance give the databases their early performance.  Bad early performance does not get reported.

3) The activity of investors chasing trends is more pronounced in hedge funds than in mutual funds, with a loss of returns of 5% in hedge funds, versus 3% in mutual funds.  This is all due to greater volatility.

4) Double alpha is generally not achievable, because most managers good at longs are not good at shorts, and vice-versa.  Going long and short are different skill sets.

The Author has a lot of experience with hedge funds, having invested with them for many years.  He knows the foibles, the pitfalls, and most of the factors that lead to subpar results.  Above all, he understands that there is no magic to hedge funds.  Just because you call you investment fund a hedge fund does not mean you will deliver market-beating results.

Aside from the book some of the works the book cites are valuable, particularly the work by Dichev and Yu, which deals with how hedge funds do well when they are small and do badly when they are big.  Trend chasing always leads to bad results, and institutional investors are not immune.

Quibbles

None.

Who would benefit from this book: Most investors would benefit from this book.  Particularly those that advise institutional clients and high net worth individuals would benefit. If you want to, you can buy it here: The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True.

Full disclosure: The publisher asked if I wanted the book.  I said “yes” and he sent it to me.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

The world is a maze of debt.  Debts layered on debts.

The Earth and its productivity is roughly the same or better than prior years.  What is the problem with the economy then?

The problem is this: there are entities that made bad loans in the past that expect to be paid back in full.  They assumed the future would be far better than it turned out to be.  There is no way that the loans will be paid back in full.  The solution is paying back at a discount, whether through compromise or insolvency.

Wait. Many of the lenders are leveraged as well, and can’t take significant losses.  Paying back at a discount will bankrupt a number of banks, which will in turn bollix the economy.

So, we have to go slow?  Does this bring us back to the problem of how one eats an elephant?  “One bite at a time.”  That is the method of Japan, leaving an over-indebted government, and reasonably indebted private sector.  But it took two decades.

Whether it is in the Euro-zone, China, or America, it would be better to let entities fail, and deal with the mess.  Yes, GDP will drop a lot, but it will rocket out of the troubles 2-3 years out, the way that Eastern Europe did post-Warsaw Pact.

Ending  the economic malaise means ending the debt overhang.  Where is the government, or set of governments willing to attack this and reduce debts economy-wide?  I know it is a tough prescription, but economies don’t work well when they are overindebted.