Another week and another interesting product crossed my desk. Unfortunately, this one proved to be interesting for all the wrong reasons. 

It was a hedge fund structure and had a long track record. The first thing that piqued my interest was that on the front page of their monthly they proudly claimed cumulative performance since inception of over 2000% vs index performance of approximately 240%. Wow! Though experience told me that not only was it an oddly huge number compared to the index, but it was an unusual way to measure performance. That said, on the surface it seemed pretty impressive, so I wanted to know more. So off I went to dig in the details of the footnotes, to figure out what was going on, only to find out that:

1. The performance data wasn’t actually for the fund I was looking at but for a fund that follows “substantially” the same investment strategy. How substantial is substantial I do not know. 99%? 51%? Who knows? No definition was given. This was not enough to be a deal breaker, but it did make me feel uneasy.
2. Then I discovered the first 4 years of the performance came from when the main fund manager worked for other people. Again, not a deal breaker, but in a history that goes back 26 years I didn’t understand why they had to use that performance. 
3. However, it all did make sense when I looked at the individual yearly performance. One of the first years had a return of 100%+, backed up by a 40%+ return the next year. When you are using cumulative performance as your performance measure, such strong performance puts it off to a great start! As a side note, I am always suspicious of strong starting performance for a fund as it is very easy to manipulate performance when you are managing small pools of money. As a dear friend of mine says, “I have never seen a bad performance figure from inception”, he has been around a long time, and he is right.
4. Next, I discovered the deal breaker and the reason why the performance of the index looked so poor versus their fund. The performance of the fund included the reinvestment of all dividends and income. The index return did not!!! So, the manager was not even comparing themselves to the index on the same basis. Very poor form and a definite deal breaker!!!
5. I then looked at the other aspects of their performance and the performance figures they were promoting did not include all the fees that the client was being charged, including a 2% placement fee direct from the client’s investment to the adviser!  Actually, the fee structure of the investment was so dreadful it deserves its own post next week.

The long and the short (hedge fund pun intended ) of it is, when you look at fund performance you should always look at the details. How performance is calculated varies greatly and making sure that the fund is comparing itself to the right index on the same basis is very important. Supposed stellar performance can quickly be shown to be smoke and mirrors when you take the time to read the details. So always beware. 

Kind regards,

Shelley Marsh
Outsourced Chief Investment Officer (OCIO) & Founder
Wealth Differently

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