Should old acquaintances be forgotten?

February 01, 2012   Amanda Cantrell

Well, thank God that’s over.

Last year may not have been quite as harrowing as 2008, but it was still pretty scary. Only a select few hedge fund managers made money, and hedge funds took a reputational beating for their lackluster results. It does make you wonder how much longer investors are going to pay hedge fund fees for returns that don’t beat the market — or protect on the downside.

One notable stumble came from King Street Capital Management. True, the firm’s flagship fund fell by only 1.2 percent in 2011, and it was the first down year in King Street’s 17-year history, as our profile on page 40 explains. But the firm is sitting on a large pile of cash. And although that move may have protected King Street from a much larger loss last year, some investors are getting antsy and putting pressure on the firm’s highly secretive founders to start investing again.

Caxton Associates fared pretty well in 2011, returning 0.70 percent. But for the past three years, Caxton didn’t come anywhere near the stellar returns the firm achieved in its early days. Now its legendary founder, Bruce Kovner, has retired, and his successor, Andrew Law, has taken over. As our cover story on page 22 shows, Law steered the firm safely around disaster in 2008 with deft trading; it remains to be seen whether he can return the firm to its former double-digit glory.

That Caxton made its best returns in its early years is true of the entire industry — or so says Simon Lack, whose provocative new book, The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True, is excerpted beginning on page 46. Investors were so starstruck by these heady returns and genius managers that they failed to negotiate for fairer terms, he argues, and the result is an unfair split of the profits that continues to this day. That matters more than ever now that public pension plans are piling into hedge funds, Lack says. If hedge fund managers don’t get it together, and fast, 2012 could be the year that investors occupy hedge funds.

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