AIMA publishes comprehensive rebuttal of 'The Hedge Fund Mirage'

06 August 2012

The Alternative Investment Management Association (AIMA), the global hedge fund industry association, has published a comprehensive rebuttal of 'The Hedge Fund Mirage', a polemic critical of the industry.

The paper, “Methodological, mathematical and factual errors in ‘The Hedge Fund Mirage’”, was written in conjunction with AIMA’s Research Committee, which features leading academics and analysts.

“Many of us in the industry looked at the arguments in the book with initial interest, and then growing scepticism. Many of the most sensational claims appeared not to be backed up by any figures. Where there were figures, the methodology was flawed. We noticed that no-one praising the book appeared to have actually checked the numbers behind it. We began to wonder if ‘The Hedge Fund Mirage’ was itself an illusion”, said AIMA CEO, Andrew Baker.

AIMA pointed to the following errors in ‘The Hedge Fund Mirage’:

• The main claim in the book, that US Treasury bills have outperformed hedge funds, is not supported by any evidence and is contradicted by all the available figures, which show that hedge funds have achieved nearly double the returns of US Treasury bills. Even the academic paper cited in the book to support this claim actually contradicts it and says the opposite, i.e that hedge funds have outperformed US Treasury bills.
• The central thesis of the book is based on the argument that dollar-weighted returns are more accurate for hedge funds than time-weighted returns. But this argument is contradicted by global best practice standards in this space. The internationally-accepted Global Investment Performance Standards (GIPS®) strongly advocate the use of time-weighted data for assessing hedge fund performance, and say that dollar-weighted return statistics are more appropriate for private equity assets. The GIPS® Guidance Statement on Calculation Methodology states: “Although the GIPS® standards allow flexibility in return calculation, the return must be calculated using a methodology that incorporates the time-weighted rate of return concept for all assets (except private equity assets)". In short, the book used a means of measuring returns best suited for private equity, applied it to hedge funds against global best practice, and came up with a mistaken conclusion as a result.
• The fees analysis in the book is based on the erroneous presumption that the gross revenues received by managers are the same thing as net profits. What it refers to as ‘profits’ are revenues before costs. In its fees calculations the book also establishes a flawed concept of ‘real investor profits’, which is confusingly not the same as the real dollars investors received. It achieves this by removing the risk-free rate (i.e. US Treasuries) from the returns achieved by hedge funds, and not surprisingly comes to a misleading conclusion. A more realistic picture was set out in a recent study by the Centre for Hedge Fund Research at Imperial College (commissioned by AIMA) which found that 72 per cent of returns generated have gone to the investor and 28 per cent to the manager.
• The main criticism of how hedge funds report in the first chapter, which forms the basis of the book’s whole case, is based on a simple sum. The book gets that simple sum wrong. The mistaken calculation is used to wrongly justify many of the claims in the book.

AIMA CEO, Andrew Baker, said: “Hedge fund returns have historically been impressive, outperforming equities, bonds and commodities. The book invents a variety of ingenious but highly misleading techniques to lower these returns, including the use of dollar-weighting against best practice, arbitrarily taking 3 per cent off returns (because of alleged ‘bias’ even though academics say the various biases cancel each other out), removing another 2 per cent by claiming that only returns above US Treasuries are ‘real’, and using one of the worst-performing indices. This is admirable in terms of chutzpah, but mistaken in methodological, mathematical and factual terms."
 
“It is clear that the main claims made in ‘The Hedge Fund Mirage’ do not stand up to rigorous examination. But we should stress that although AIMA is the global hedge fund industry association and obviously represents the interests of that industry, we are not of the view that the industry should not be criticised. There are many legitimate grounds on which to do so, and indeed AIMA itself has worked since its inception in 1990 to raise industry standards through its sound practices work.” 

Press release

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