The Alternative Investment Management Association

Alternative Investment Management Association Representing alternative asset managers globally

AIMA publishes comprehensive rebuttal of 'The Hedge Fund Mirage'

06 August 2012

The Alternative Investment Management Association (AIMA), the global hedge fund industry association, has published a comprehensive rebuttal of ‘The Hedge Fund Mirage’, a polemic critical of the industry.

The paper, “Methodological, mathematical and factual errors in ‘The Hedge Fund Mirage’”, was written in conjunction with AIMA’s Research Committee, which features leading academics and analysts.

“Many of us in the industry looked at the arguments in the book with initial interest, and then growing scepticism. Many of the most sensational claims appeared not to be backed up by any figures. Where there were figures, the methodology was flawed. We noticed that no-one praising the book appeared to have actually checked the numbers behind it. We began to wonder if ‘The Hedge Fund Mirage’ was itself an illusion,” said AIMA CEO Andrew Baker.

AIMA pointed to the following errors in ‘The Hedge Fund Mirage’:

  • The main claim in the book, that U.S. Treasury bills have outperformed hedge funds, is not supported by any evidence and is contradicted by all the available figures [1], which show that hedge funds have achieved nearly double the returns of U.S. Treasury bills. Even the academic paper cited in the book to support this claim actually contradicts it and says the opposite, i.e that hedge funds have outperformed U.S. Treasury bills.
  • The central thesis of the book is based on the argument that dollar-weighted returns are more accurate for hedge funds than time-weighted returns. But this argument is contradicted by global best practice standards in this space. The internationally-accepted Global Investment Performance Standards (GIPS®) strongly advocate the use of time-weighted data for assessing hedge fund performance and say that dollar-weighted return statistics are more appropriate for private equity assets. The GIPS® Guidance Statement on Calculation Methodology [2] states: “Although the GIPS® standards allow flexibility in return calculation, the return must be calculated using a methodology that incorporates the time-weighted rate of return concept for all assets (except private equity assets).” In short, the book used a means of measuring returns best suited for private equity, applied it to hedge funds against global best practice, and came up with a mistaken conclusion as a result.
  • The fees analysis in the book is based on the erroneous presumption that the gross revenues received by managers are the same thing as net profits. What it refers to as ‘profits’ are revenues before costs. In its fees calculations the book also establishes a flawed concept of ‘real investor profits’, which is confusingly not the same as the real dollars investors received. It achieves this by removing the risk-free rate (ie U.S. Treasuries) from the returns achieved by hedge funds, and not surprisingly comes to a misleading conclusion. A more realistic picture was set out in a recent study by the Centre for Hedge Fund Research at Imperial College (commissioned by AIMA) which found that 72% of returns generated have gone to the investor and 28% to the manager.
  • The book arbitrarily reduces hedge fund returns by 3% in order to compensate for alleged ‘biases’. But biases can be both positive and negative, and academic studies (for example, Edelman, Fung and Hsieh) have demonstrated how negative biases are in fact cancelled out by similarly strong positive biases, such as the fact that some of the largest and most successful hedge funds do not report their returns to data providers.
  • The main criticism of how hedge funds report in the first chapter, which forms the basis of the book’s whole case, is based on a simple sum. The book gets that simple sum wrong [3]. The mistaken calculation is used to wrongly justify many of the claims in the book.

AIMA CEO Andrew Baker said: “Hedge fund returns have historically been impressive, out-performing equities, bonds and commodities. The book invents a variety of ingenious but highly misleading techniques to lower these returns, including the use of dollar-weighting against best practice, arbitrarily taking 3% off returns (because of alleged ‘bias’ even though academics say the various biases cancel each other out), removing another 2% by claiming that only returns above U.S. Treasuries are ‘real’, and using one of the worst-performing indices. This is admirable in terms of chutzpah, but mistaken in methodological, mathematical, and factual terms.
“It is clear that the main claims made in ‘The Hedge Fund Mirage’ do not stand up to rigorous examination. But we should stress that although AIMA is the global hedge fund industry association and obviously represents the interests of that industry, we are not of the view that the industry should not be criticised. There are many legitimate grounds on which to do so, and indeed AIMA itself has worked since its inception in 1990 to raise industry standards through its sound practices work.”

- Ends –

For media enquiries, please contact Christen Thomson, AIMA’s Director of External Affairs.
Tel: +44 (0)20 7822 8380; Email:

Notes to editors
To download “Methodological, mathematical and factual errors in ‘The Hedge Fund Mirage’”, click here:


[1] Investors put $1.24 trillion into hedge funds over the period 1998-2011 and have $1.78 trillion to show for it, a 44% return. By contrast, investing $1.24 trillion in U.S. Treasury bills over the same period would have produced $1.52 trillion, a 23% return.

[2] "GIPS® Guidance Statement on Calculation Methodology" (CFA Institute, 2006)

[3] The example is of an investor who puts $1 million in a fund that has a +50% return in a single year. The investor adds another $1 million in year two, when the fund is down 40%. Net, the investor has lost 25% of his money, and the fund will report a compound average annual growth rate of -5.13%. But the book wrongly says that the fund will report +5.13%.

About AIMA
As the global hedge fund association, the Alternative Investment Management Association (AIMA) has over 1,300 corporate members (with over 6,000 individual contacts) worldwide, based in over 50 countries. Members include hedge fund managers, fund of hedge funds managers, prime brokers, legal and accounting firms, investors, fund administrators and independent fund directors. They all benefit from AIMA’s active influence in policy development, its leadership in industry initiatives, including education and sound practice manuals and its excellent reputation with regulators worldwide.

AIMA is a dynamic organisation that reflects its members’ interests and provides them with a vibrant global network. AIMA is committed to developing industry skills and education standards and is a co-founder of the Chartered Alternative Investment Analyst designation (CAIA) – the industry’s first and only specialised educational standard for alternative investment specialists. For further information, please visit AIMA’s website,

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