The overwhelming majority of investors fail because the fees charged by the investment management industry are way too high for the value they provide, Yale endowment guru David Swensen says.
"Even if the returns they generated were real, they were paid too much, and in the context of the absolutely disastrous performance of these institutions their pay was obscene," Swensen told the Financial Times.
Under Swensen, Yale's endowment — which supplies 44 percent of the university’s budget — returned an average of 16.3 per cent a year after fees for the 10 years to June, 2008.
That’s nearly three times the return of the average college endowment.
Yale's top investor says absolutely nobody should invest through hedge “funds of funds,” which charge additional fees for allocating investors’ money to an underlying range of hedge funds, which charge their own fees, too.
"You can't make sensible investment decisions with funds of funds or consultants," Swensen says. "Madoff is just a great example of the dangers of making an investment and not understanding where the money is going."
Swensen is also highly critical, too, of the way investment banks price swap transactions.
“Instead of using the same discount rate when selling and buying, they will say that on the cash flows you owe us, we're going to use a low discount rate, and on the cash flows we owe you, we're going to use a high discount rate,” Swensen notes.
“It's stunning that anyone could say something like that with a straight face.”
Hedge funds lost more money in 2008 than any year on record as their returns fell an average of 18 percent, according to data compiled by Hedge Fund Research.
Things could get worse in 2009, forcing fund managers to overhaul investment strategies, reduce fees, and make it easier for clients to withdraw cash, Bloomberg reports. Most hedge funds do not let clients pull money except on a quarterly basis, due to the complex trades they under take.
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