The reality is that even though investors such as Messrs. Paulson and Einhorn score high-profile successes, those successes are rarely duplicated or repeated, even by the managers themselves. In fact, those headline numbers are often much bigger than the final returns made by investors who pay 2% of assets and 20% of returns for the privilege of investing alongside the smart money.
In fact, it is a wonder that anyone invests in these hedge funds at all. A 2007 study by John Griffin at the University of Texas and Jin Xu at Zebra Capital Management examined 24 years of data, concluding that there was “weak statistical evidence” to hedge funds’ superiority relative to the market. The lackluster performance, the authors said, “raises serious questions about the proficiency of hedge fund managers.”