Across My Desk: Hedge Funds

Hedge fund headaches. For those enamored by the lure of the tasty returns hedge funds often boast about, consider this: Those high returns ain't necessarily so.

Here's what a mid-September issue of Money Management Executive had to say about hedge fund returns:

"Many investors believe hedge funds deliver returns of 20% or more each year. That may be the case in some instances, but the data available on hedge fund performance is tainted and doesn't take into account the hefty fees hedge fund managers charge and the enormous risks they assume, The Wall Street Journal reports.

Case in point: Amaranth Advisors, a $7.5 billion hedge fund, is down 35% year-to-date after taking a gamble natural gas prices would rise.

Another case in point, made by Roger Ibbotson, founder of Ibbotson Associates, and Peng Chen, the firm's president, is that TASS data that shows hedge funds returned 16.5% a year between 1995 and April of this year, compared to the S&P 500's 11.6% average -- is flawed.

Hedge funds sometimes include previous results in their performance data, Ibbotson and Chen say, on top of which, only strong performers tend to report their figures. Further, poorly performing hedge funds frequently go out of business, with their poorly performing figures right with them. Such "survivorship bias" can skew hedge fund data upwards.

As a result, the two researchers believe hedge funds actually returned just 9% a year over the past 11 years -- seven-and-a-half percentage points lower than the TASS database."