You've seen this before in hedge fund pitch books, right? "Our fund achieves equity-like returns with bond-like volatility."

Ummm, that is, maybe it did achieve these returns-- until the first sign of real market volatility in 2008 when the whole thing blew up because of its 6,000 times leverage.

The first problem I have with this expression is that although it sounds nice, very few hedge funds actually achieve 15% (or higher) annualized returns with 1-2% volatility on a consistent basis, despite whatever their pitch books claim. If that were true then there would be a whole lot more competition for the big players (Och Ziff, Baupost, Adage, Millenium) and there isn't. The industry is bifurcated; the funds who do outperform holding most of the capital and rest competing for the crumbs.

Secondly, even if they are achieving this, the way they're doing it has little to do with traditional equity or fixed income investments. They do it using sophisticated trading strategies using derivatives that cost a ......................

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