Hedge funds are key players in the world's financial markets, but no one knows exactly what they're up to.
Critics and supporters, tend to share one assumption: that hedge funds are managed by some pretty talented people. Otherwise, investors would not pay the hefty management fees, typically 1% to 2% of assets and 20% of profits.
But new research by Wharton statistics professor Dean P. Foster and Brookings Institution senior fellow H. Peyton Young questions that assumption, arguing that it's easy for hedge funds to fool their investors into believing the managers are better than they really are. If so, investors cannot distinguish good managers from bad.
While it's not possible to determine how many hedge fund managers are scammers, if there were many it would suggest that hedge funds are doing more harm to the financial markets than good. According to the researchers, the industry "risks being inundated by managers who are gaming the system rather than delivering high returns, which could ultimately lead to a collapse in investor confidence."
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