As we have discussed many times, the evidence demonstrates that hedge funds have consistently failed to deliver on their promise of alpha. There is an overwhelming body of research indicating that hedge funds must be ego-driven investments, because there can be no other explanation for why investors continue to pour money down the proverbial drain. The following are only some of the many problems with investing in hedge funds:
- Lack of liquidity due to lock-up periods
- Tax inefficiency because of high turnover
- Non-normal (lotterylike) distribution of returns
- High risk of a fund dying early; the average life span is only about five years
- Lack of transparency
- Agency risk created by incentive structures (mismatched incentives)
- Large biases (survivorship and liquidation) in the data.
- Riskiness of the assets (including the use of leverage)
- No persistence of performance beyond the randomly expected
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