By MoneyMorning.com.au

When you hear ‘hedge fund manager’, what do you envision?

Is it a filthy rich man in his 40s to 70s?

Is he an aggressive, limousine-riding, private jet-flying, wheeler and dealer?

Does he seek prestige, cash rewards and the raw pleasure of getting his way…and will he stop at nothing in its pursuit?

This stereotype hasn’t changed in 30 years.

But that’s with good reason. For the most part, it’s accurate. Money drives hedge fund guys, pure and simple.

If you align your interests with these stock market marauders, you can share in their financial success.

But give these guys an inch, and what they’ll try to get away with will shock you…

Hedge funds are notorious for charging high fees to the investors who entrust their cash to the firm.

A ‘two and 20’ model is the historic norm. That means if you let a hedge fund manage your money, you’ll pay a 2% annual ‘management fee’, and if the manager leads the fund to outperform the market, you’ll also pay the staff 20% of those ‘outperformance’ profits.

You can see why hedge funds push this fee structure. It can be fabulously lucrative. Some of the top-performing hedge funds make returns of more than 50% in a good year. A medium-sized firm might run billions of dollars of investors’ money. That’s why talented managers who can attract funds and grow them can personally earn upwards of hundreds of millions of dollars per year.

They do this because they can get away with it. Investing is a tough game — and people will pay good money to give themselves the best chance of winning. That means hedge fund fees go largely unchallenged.

But remember what we told you about what drives hedge fund guys?

Sometimes the fees aren’t enough. According to the Financial Times, some hedge fund managers are ripping salaries, private jet expenses and entertainment costs directly out of the funds they manage.

They’re living the high life on their investors’ dime. This kind of abuse is tantamount to theft.

It erodes investment returns, let alone the shaky faith people have in professional investors to do the right thing.

KB Associates is an operational advisor to fund managers in London, New York and the Cayman Islands. Phillip Chapple, an executive director in KB’s London office, says:

‘I think a lot of managers see this as a way of eating up expenses that they incur as a fund manager. It is very hard to look people in the eye and justify some of that stuff. If you find them doing this, then you wonder what else they are doing.’

Amazingly, some investors turn a blind eye to these japes. Remember, profits are the first and final motivator here. And some big hitters will still invest with the worst offenders if the fund makes healthy profits.

The way these guys see it, as long as the music plays, you have to keep dancing.

If the global panic of 2008 chastened the investment industry, it’s clearly now back to business as usual.

One former fund manager told the Financial Times that ‘the onus is on the investor to understand what they are invested in [but] it is slightly hidden in the documentation. We had to go digging for it.’

That manager just revealed a financial truth as old as the hills: caveat emptor. Let the buyer beware.

And if you think high-flying hedge fund rainmakers are the only pigs with their snouts in the trough, think again…

Take a look at the latest glossy update that your friendly superannuation fund mailed out.

You might find the super fund’s annual fee is as high as that charged by some of the world’s most ferocious hedge fund operators.

At least the hedge fund invests boldly and leaves few stones unturned in the pursuit of beating the market.

What does the super fund do for its fee?

Chances are the manager grows your pension pot by less than the return on the broader stock market. If that’s the case, think long and hard about whether they’re earning their keep.

And if you want to know exactly where your annual fee goes, have fun digging through a mountain of confusing documentation.

There’s a troubling parallel in that lack of transparency between the ‘masters of the universe’ and the outwardly meek-and-mild suits of Australia’s super industry.

Whether you’ve entrusted your hard earned to a hedge fund or super fund manager, the least you deserve is a clear view of where your money’s going.

Fund managers get rich on the back of investors who are afraid to rock the boat. Don’t be one of them. Whether your interest lies in resource stocks, high technology, emerging growth or property — there has never been a better time to take back control.

Cheers,

Tim Dohrmann+,
Editor, Money Morning

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The post The Awful Truth about Hedge Funds appeared first on Stock Market News, Finance and Investments | Money Morning Australia.

By MoneyMorning.com.au