Response to "The $500 Billion Hedge Fund Folly" of August 6, 2001, Forbes magazine - 08/08/01

To the editors of Forbes Magazine,
I am amazed that Forbes would run an article, much less a cover story, of the crass, sensationalistic nature as seen in your "The $500 Billion Hedge Fund Folly" of August 6, 2001. As the manager of a top performing hedge fund over the past seven years, I have been particularly aware of the growing excesses in my industry. In letters and speeches I have been an active critic of the manner in which the hedge fund industry has grown in the midst of a stock market boom. As much as anyone in this business, I like to see publications like Forbes challenge the growing excesses and abuses found in many hedge funds today.
Sadly, your Hedge Fund Folly article is nothing short of a sensationalistic indictment of the entire industry. While the article accurately portrays many of the problems with what may be the majority of hedge funds today, it suggests all funds are run by con artists who "soak you with high fees and underperform the market".
A basic rule for any investor in hedge funds should be that if the manager cannot generate returns net of all fees and expenses that beat the market averages, then that manager should not receive your investment. Why pay a hedge fund manager 20% of the profits if he cannot beat the averages? You will be better off simply investing your money in an index fund.
Sadly, having just experienced the biggest economic and stock market bubble since the 1920's, the excesses in the hedge fund and mutual fund industries today are vast. The majority of managers badly underperform the market and many investors are putting their savings into funds that may generate respectable pre-tax returns, but miserable after-tax returns.
No one more than I would like to see Forbes attack the excesses of the hedge fund industry. But you do your readers a disservice by arguing all hedge funds are poor investments and all managers disreputable.
The fact is many hedge funds are very well run by highly ethical managers. They put their own money in their fund, often with the money of friends and family members. These managers are not gunslingers and as a group represent the best money managers in the investment advisory business today. Although they may represent a minority of all the hedge funds in existence at the end of a huge stock market bubble, they remain the only safe harbor for wealthy U.S. taxpayers to obtain well managed, above average, after-tax returns. What your readers need is not an article that attacks an entire industry, but rather one that points out the problems and then provides investors with a framework for wading through all the hype in order to find the funds that are well managed.
By producing articles that only seek to sensationalize the bad with no allowance for or acknowledgement of the good, Forbes lowers itself to the pathetic journalistic standards of Time magazine and The National Enquirer. Keep it up and you'll find your magazine relegated to the newsstands next to the supermarket check out counter.
Sincerely, David Taft, President IBS Capital Corp.