I have 4 words: Opaque, expensive, and levereged.

I have no exposure to hedgefunds ATM.

As for the transparency, with my company I invest in about 20 hedge funds and they all give me full access to their positions at any time, under the agreement that it’s for our eyes only (last year one manager wanted to stop showing us the book and we sold straight away, no second thoughts).

This is just to say that the common perception that ALL hedge funds are evil black boxes is an ignorant generalization and it’s possible to invest with very honest and transparent managers, who have great reputations and stay in touch with the investors. It’s just a matter of doing the homeworks before investing…

Hedge fund fees are ridiculous and the gating features are perhaps onerous, but they are not entirely unjustified. They can serve to protect the interests of a fund’s investors by preventing a fire sale of illiquid assets and by ensuring that all clients are treated equally. It’s also true that the gate has the convenient side benefit of temporarily propping up the fee due to the manager. Even this is not entirely without logic, however. Many of the hedge funds that were started in the last few years have no operating capital behind them. Without the fees coming in, they can’t pay the rent or the analysts. Investors could have chosen to invest only with hedge funds that could sustain themselves through hard times, but they didn’t. They chose instead to give the fund managers a sort of “insurance” that the fees would not dry up immediately. Caveat emptor.

The prevalence of gating features creates an interesting effect on any new hedge fund that might be interested in launching without a gate. If you try to start a fund like that, the lawyers who advise you will highlight to you the fact that if you have no gate but everyone else does, your clients will view you as their first source of liquidity when times get tough. You could be the very best manager in your client’s portfolio, but if he needs money, he’s going to take it from where he can, and if that means all the money comes from you and that you are going to go under, too bad for you, you should have had a gate too.

FT:

Mr Owayda said the “2 and 20” model, whereby private equity groups charge an annual fee of 2 per cent of funds raised and take 20 per cent of any profits – was a relic from a time when most buy-out funds were much smaller.

“For some reason that 2 per cent stuck even when somebody is raising $10bn,” he said. Hedge funds, which use a similar 2 and 20 model, have already come under pressure to cut fees after the dire returns suffered by their industry this year.

Mr. Bernanke said the regulatory oversight applied to hedge funds was “relatively light” and acknowledged that their growing market share had raised concerns about possible systemic risks. “The failure of a highly leveraged fund holding large, concentrated positions could involve the forced liquidation of those positions, possibly at fire-sale prices, thereby imposing heavy losses on counterparties,” primarily very large commercial and investment banks, Mr. Bernanke said. “In the worst scenarios, these counterparty losses could lead to further defaults or threaten systemically important institutions,” he added.
Reuters

No shit sherlock.

(Reuters)