Hedge funds' image as money machines

It sounds like pretty much everybody in the investment business has come to the conclusion that hedge funds are part of an optimal investment strategy. Academic research in the last few years has generated a surprising amount of evidence calling the image of hedge funds as "money machines" into question. From a practical portfolio management perspective, these findings suggest some preliminary warnings and guidelines: 1. Don't trust your portfolio optimization software if it tells you to invest 60% of your assets in hedge funds. 2. Hedge fund returns are lower than the raw data suggest, and they may carry significantly more unsystematic (that is, non-market) and systematic (that is, market) risk than is apparent. 3. Build an "uncertainty factor" into your models and do not invest more in any given hedge fund or even style category than you can afford to lose.