According to me, hedge funds and active portfolio management rarely pay off for investors in the long run. This is primarily related to the outrageous fees they charge. (3-10% of the total amount invested vs an passive strategy that charges less than 1.5%) You also generally need 30-60 years of performance data to tell what is skill vs luck. (They call this data "noisy").
I see why people sell them (massive commissions) but why do people such as pension trustees buy into them? Theoretically, as trustees and fiduciaries, they don't benefit from the high fees. My contention is that those high fees end up flowing back to the trustees and politicians via campaign donations, free trips, political favors and other "soft dollar" goodies.
Based on this article, it looks like the WSJ has found one of these schemes. It's rare that you get to see this corruption in action so I thought I'd bring it to light.
Christopher
Indicted N.Y. Political Adviser's Firm Secured Business in Another State
By CRAIG KARMIN and PETER LATTMAN
A firm affiliated with Hank Morris, the political adviser indicted last month on allegations of extracting improper fees in exchange for investments from New York state's pension fund, helped investment firms secure business in at least one other state, according to people familiar with the matter.
Private-equity firms Quadrangle Group and Carlyle Group, whose names have already surfaced in connection with the alleged pay-to-play case involving New York's public pension fund, used the placement firm Searle & Co., with which Mr. Morris was affiliated, to get investments from a government-run fund in New Mexico, according to a spokesman for the New Mexico fund.
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