PER 2015
Activist investors are often stereotyped as ruthless, bloodthirsty corporate raiders, prepared to fire as many staff as it takes to turn a company around. This is partly due to Michael Douglas’ portrayal of Gordon Gekko in the 1987 film Wall Street (and its disappointing 2010 sequel). In the original, Gekko built up a position in failing Bluestar Airlines before attempting to strip its assets and lay off employees to access the corporate pension fund. However within the last decade activist funds have re-
emerged as a force for good. Organisations such as the Interfaith Center on Corporate Responsibility now push for non-financial changes, addressing concerns such as human rights and environmental
sustainability. Fund of Funds
Funds of Hedge Funds typically invest in 10-30 underlying hedge funds and are more accessible to the average investor. Portfolio theory states that by diversifying capital, the investor can reduce risk while at the same time maintaining the same return. One issue with FOF investing, however, is the significant fee charged by each fund. These fees come in addition to the 1.5% management fee and 15-30% performance fee charged by the FOF manager. Hedge Fund Criticism
In 2008, Warren Buffett bet $1m dollars that a basic S&P 500 index tracker would outperform a portfolio of hedge funds selected by Protégé Partners over a ten year period. Seven years into the bet and Buffett is comfortably ahead. The S&P tracker has produced a compound return of 63.5%, over three times the 19.6% return produced by Protégé Partners’ fund of hedge funds.
This brings into the question the moral and economic justification for enormous retainer and performance fees that the industry’s managers rake in. A Hedge Fund with $1 billion in assets under management would turn over a guaranteed $20 million annually even if they had a negative return on investment (though they would likely have significant withdrawals at the end of the year). Warren Buffett, perhaps unsurprisingly, is slamming of the current ‘2 and 20’ model. He argues that since hedge funds share only the profits and not the losses, such fees create and incentive for high risk trades. The hedge fund industry has also drawn criticism for the systemic risk it poses. The collapse of Long- Term Capital Management, a famous Connecticut based fund, in the late 1990s almost singlehandedly brought the US economy to its knees. In the end no public bailout was necessary but
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