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Rich investors ditch hedge funds -- What does it mean?

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According to this weekend's Wall Street Journal, the rich are "bailing out" of hedge funds. Says Robert Frank, "In 2005, the world's financial millionaires (those with investable assets of $1 million or more, not including primary residence) had 20% of their investments in alternatives. In 2006, they cut that exposure in half, to 10%."

Of course, everyone is speculating about what it all means. Are the days of big returns from hedge funds over? Are we approaching a credit crisis, or another Long-Term Capital Management-style blow-up that will threaten the liquidity of the capital markets?

Here's another possibility that may be part of the explanation: Maybe astute, wealthy investors are realizing that hedge funds can't, on average, generate returns strong enough to justify the "2 and 20" compensation plans that make even mediocre managers exceedingly wealthy.

If scholars like Burton Malkiel are even close to being right about the efficiency of markets, hedge funds are a bad deal.

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Last updated: November 26, 2009: 12:42 AM

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