The bottom line is that hedge fund managers get paid for making bets that put their investors at risk, while taking very little risk themselves. If the fund blows up, the investors cannot tell whether it was due to bad management or just bad luck.
Tuesday, March 11, 2008
Before you invest in a hedge fund...
We have blogged about the incentive alignment problem of hedge fund managers (Hedge fund managers misreport returns and Compensating Hedge fund managers), paid on a "2 and 20" (2 percent of the money they raise and 20% of the profit). Two economists mock this scheme as gambling with other peoples' money ("heads I win, tails you lose").
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