Hedge funds have a fee structure called two and twenty. Two percent on the capital invested, and twenty percent on the profits they earn on the assets in which the capital is invested. That means that the returns have to be really good before investors get something themselves.
Many investors are getting a negative return, meaning that they’d be better off with the money stuffed in a mattress. The hedge fund managers are earning fortunes, but it seems that’s still not enough.
Two recent studies have found that the hedge funds are adjusting their figures subsequent to the initial announcement. What at first looks like good accounting is, on closer examination, just another way of gauging from investors.
Some of the prior adjustments are downwards, and that happens a lot in cases where the fund needs to be above its previous highest valuation before performance fees are earned. By reducing earlier figures, the performance target is lower.
The others, not constrained by the performance target, and that revise their figures upwards do so to look better for prospective investors.
The research found that investors who chose an adjustment of the earlier figures as an immediate trigger to sell out of the fund outperformed those who stayed invested by a considerable 3.3%.
And hedge fund managers wonder why their popularity is at an all time low?