Fun with numbers

As Pommygranate explained a year and a half ago, hedge funds are not only a zero-sum game*, but the managers charge handsome fees on top - a 2% management charge on the total investment, plus 20% of any upside, making is a negative sum game from the investors' point of view.

It appears that there were lots of 'funds of funds' or 'feeder funds' that exist merely to invest in actual hedge funds, such as, er, Bernie Madoff's, 'nuff said. Their charging structure is just as outrageous, according to the FT it's 1% management charge and 10% of any upside.

So, to break even (and assuming no gearing), if you invest in a 'fund of funds', the underlying return would have to be well over 4%, year on year. Seeing as hedge funds are ultimately a zero-sum game, you would be getting poorer on average by 4% a year. Hmmm. Even the bank of mattress gives you better returns.

* I could put a perfectly convincing case why the price of anything - let's say gold - is going to rise over the next year, and entice investors to entrust me with their money in my GoldBull Fund. Somebody else could make the equal and opposite case that the same commodity is going to fall in price and set up his own GoldBear Fund. Whichever one of us is right, we both collect 2% of the money entrusted to us, plus 20% of the movement in the price of gold, be that up or down; or if we gear up ten-to-one, 200% of the movement in the price of gold.