Hedge Funds: Where are the Customers‘ Yachts?

That's the question raised by The Economist in this article.

The editors of The Economist seem to have difficulty believing in Tinker Bell or hedge funds. Still, the article offers useful stats and raises a pertinent question: How long will investors pay alpha prices for beta performance?

Quite a while, probably. The article concludes that hedge funds' boosters and detractors both exaggerate:

Hedge funds are not the panacea for every pension-fund deficit, nor are they the cause of every ill in the financial markets. They are like a fast-growing adolescent, sometimes boisterous, sometimes clumsy but still developing. Where skill does exist, clients will probably find that managers get the bulk of the benefits. But as long as clients blindly believe in that skill, they will pay for the hedge funds' yachts.

For a somewhat more positive take on hedge funds, see this interview with Steven Drobny, President, Drobny Global Advisors.

Drobny believes the astonishing expenses faced by hedge-fund investors pose no problem:

"Investors are allowed to choose what they want and if they don't like something they can vote with their feet."

About that yacht

If you've followed Ben Stein's advice and struck it rich running your own hedge fund, you can pick up the cool old yacht above for a mere 900,000 euros. German-built in the early 1920s, the vessel later served as the official presidential yacht of Generalissimo Franco of Spain.