We've all heard the stories about hedge fund managers earning huge fees. According to Forbes, there were at least three hedge fund honchos that made over a billion dollars in earnings last year -- and over 20 that earnt $100 million or more. Whilst earnings have been booming for some managers, there are also swathes that have struggled over the last few years. There are also many that have simply blown up.
Whilst many hedge fund managers are lauded as legends, many of those managers are not overnight successes. John Paulson from Paulson & Co was rumored to have made over $1.25 billion in one morning alone in 2007, from his infamous short against the U.S. housing market. However as documented in the best-selling book on the saga, The Greatest Trade Ever, Paulson spent many years plugging away in obscurity prior to this trade.
With these stories of great successes in mind, it was interesting to read recently that London-based Insynergy Investment Management is to close down its funds management operation after only a couple of years in business. Insynergy was launched in 2009 with the backing of the popular UK TV personality and former Dragons Den 'judge' James Caan.
In fairness, the concept on the face of it, sounded like a good idea. They were essentially looking to offer access to some of the largest institutional-grade hedge funds, to smaller investors. With the Dragon's Den personality behind it, they were able to secure arrangements with some of the supposedly safest and best known hedge fund managers in the industry, such as Crispin Odey of Odey Asset Management.
Presumably they thought that with James Caan as the face of the business, they would rake in the cash from investors. However, from the reports about their closure it seems that this was very far from what transpired. According to FT Adviser, the latest reports show that the funds had raised between £1.5 million and £2.7 million in total fund sizes. Basically, in hedge fund terms, absolute peanuts. Obviously with funds these sizes the costs of administration alone were going to be unsustainable - as indeed would seem the case given that they are now being wound up.
More disappointingly for those that were attracted by the proposition, FT Adviser further reports that two of their four flagship funds are down over 30% each since inception.
Like we say, the concept of providing smaller investors with access to hedge funds normally out of the realm of ordinary investors, is a good one. However, the reality is that there is a very good reason why these investments are only marketed to sophisticated investors. These investments can often offer returns much more akin to gambling returns, and not really suitable for the ordinary investor.
In summary, a few things may be able to be taken from this recent situation. The first is that it takes more than a Dragon's Den personality to be a successful fund manager in today's markets. Furthermore, fund managers need to do more than simply invest in other funds - they need to add value in order to raise substantial funds and to earn their keep.