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All Hedge Funds May Not Be Bad — Here’s How to Suss Yours Out

Forbes – There’s a public debate raging about the pros and cons of hedge funds—not any individual hedge fund, mind you, but rather hedge funds in general.

There’s been plenty of skeptical talk in my circles. As a whole, the industry has produced very lackluster returns over the past couple of years, with the S&P 500 index clobbering the leading aggregate hedge-fund index. In 2012, the HFN Hedge Fund Aggregate Index was up 6.65 percent while the S&P 500 was up 16 percent. In 2011, the same hedge fund index had a return of -4.5 percent while the S&P 500 was up 2.11 percent. A well-reviewed new book by hedge-fund veteran Simon Lack, The Hedge Fund Mirage, argues that “if all the money that’s ever been invested in hedge funds had been put in Treasury bills instead, the results would be twice as good.” Meanwhile, SAC Capital, the famous Connecticut hedge fund founded by Steven Cohen, shelled out $616 million this month to government-securities regulators to settle insider-trading lawsuits. It’s longtime portfolio manager was arrested last week.

So are hedge funds all bad? I decided to ask my friend Brian Portnoy, one of the country’s foremost experts on hedge funds, for his take. A CFA with a Ph.D. from the University of Chicago, Portnoy is a sought-after due-diligence man who specializes in scrutinizing hedge funds. His book, The Investor’s Paradox, is coming out soon and he makes a lot of sense on the history of hedge funds, how they work and how people and institutions make decisions about which ones to buy.

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