Horrendous hidden fraud

Magda Wierzycka’s explanation of how hedge funds fluff up their performance by the dishonest use of survivorship bias has similarities to the exercise of assessing a surgeon’s skill only after he has buried his mistakes (Sygnia closes the book on fee-fleecing hedge funds, August 15).

If you asked the collective of all fund managers how good they were, they would say that they could comfortably outperform the market, even after extracting their astronomical fees. This is mathematically impossible. Fees, plus management costs, can sometimes exceed 5% per annum. This can almost sound reasonable if performance justified it. But think again. If fund managers can produce a return of 10% per annum and charge 5% fees then this would leave 5% for the client — half the investment profit being pocketed by the managers. This is such a horrendous hidden fraud that it demands restating: something like half the investment that would otherwise be due to the client over the full term of the investment is forfeited to fund managers.

Total this up for the industry and it would make the Steinhoff scandal pale by comparison. The best solution for the investor is probably the most obvious. Pick a fund that pays the vast majority of its dividends over to the client and does not churn the investment portfolio too much.

Robin Ducret

Cape Town