Money Management By Failure, continued
Last time, we said "money management by failure" works for more money managers than you might imagine. If you haven't seen it first hand, you'll just think I'm exaggerating. Or maybe you'll think the example of Long-term Capital is somehow unique. So let's take a look at some other examples. I'm going to use personal experience here.
I once worked for a financial firm that sold, among other things, hedge funds, to its clients. The firm was very successful and had a good reputation. It housed about 10 hedge fund managers, in addition to its more traditional investment business. In fact, it was somewhat of a pioneer in the creation and marketing of hedge funds.
After being recruited to this firm, I arrived with a sense of excitement. I had never worked directly with hedge funds before. They were a bit exotic at the time. This would be fun, I thought. Then I began hearing stories of "imploding" hedge funds from the veterans of the firm with whom I worked.
Long-term employees would tell me about how this or that hedge fund was formed, client money was invested and, after a few years, the fund would lose a ton of money. I thought the stories were exaggerated. Since I had no direct experience with hedge funds up to that point, the stories just sounded improbable.
Then, while I was there, three funds, all within my first year at the firm lost lots of money - one a ton of money. And one of these big losers was a fund that had been in business over a decade, with a stellar record of generating profits month after month, with few monthly losses. (Hedge funds typically report monthly results.) This stellar fund lost 16% in a month. Another, rated as one of the best "small cap" hedge funds in its day, lost almost 30% within a couple of months. A third, a software hedge fund, again ranked very highly, lost over 90% of its value that year! (That's the one that lost a "ton" of money.)
Every one of the hedge fund managers was considered brilliant. They all had great resumes, backgrounds, and - I can personally attest - were very smart. Frankly, I didn't know what to think. But I really wanted to understand what happened.
I spent the next couple of months doing a little sleuthing. Beside my own reading and study about hedge funds and the various hedge fund strategies out there, I went back to the folks who had told me about past implosions. I asked them for more details so that I could understand both what happened before I arrived at the firm and what happend while I was there. It was, to say the least, a great education.
As you might imagine, I am now very skeptical of hedge funds. That doesn't mean there aren't a lot of very talented, smart people running hedge funds. Some of them even have very fine track records over a number of years. It's just that after what I learned, I'm a bit gun shy about trusting my hard-earned money (or my clients' money) to these guys.
Coincidentally, a hedge fund manager just proposed that I invest money in his fund. Part of his written proposal stated that his fund "couldn't implode." I guess hedge fund implosions are on the minds of other prospects out there. It's not just me.
Of course, I wondered about the appeal of investing in a fund that felt that the fact that it woyuld not "implode" might be considered a positive attribute. Isn't that a bit strange? Would that make you feel confident in investing in such a fund? It certainly didn't attract me.
I once worked for a financial firm that sold, among other things, hedge funds, to its clients. The firm was very successful and had a good reputation. It housed about 10 hedge fund managers, in addition to its more traditional investment business. In fact, it was somewhat of a pioneer in the creation and marketing of hedge funds.
After being recruited to this firm, I arrived with a sense of excitement. I had never worked directly with hedge funds before. They were a bit exotic at the time. This would be fun, I thought. Then I began hearing stories of "imploding" hedge funds from the veterans of the firm with whom I worked.
Long-term employees would tell me about how this or that hedge fund was formed, client money was invested and, after a few years, the fund would lose a ton of money. I thought the stories were exaggerated. Since I had no direct experience with hedge funds up to that point, the stories just sounded improbable.
Then, while I was there, three funds, all within my first year at the firm lost lots of money - one a ton of money. And one of these big losers was a fund that had been in business over a decade, with a stellar record of generating profits month after month, with few monthly losses. (Hedge funds typically report monthly results.) This stellar fund lost 16% in a month. Another, rated as one of the best "small cap" hedge funds in its day, lost almost 30% within a couple of months. A third, a software hedge fund, again ranked very highly, lost over 90% of its value that year! (That's the one that lost a "ton" of money.)
Every one of the hedge fund managers was considered brilliant. They all had great resumes, backgrounds, and - I can personally attest - were very smart. Frankly, I didn't know what to think. But I really wanted to understand what happened.
I spent the next couple of months doing a little sleuthing. Beside my own reading and study about hedge funds and the various hedge fund strategies out there, I went back to the folks who had told me about past implosions. I asked them for more details so that I could understand both what happened before I arrived at the firm and what happend while I was there. It was, to say the least, a great education.
As you might imagine, I am now very skeptical of hedge funds. That doesn't mean there aren't a lot of very talented, smart people running hedge funds. Some of them even have very fine track records over a number of years. It's just that after what I learned, I'm a bit gun shy about trusting my hard-earned money (or my clients' money) to these guys.
Coincidentally, a hedge fund manager just proposed that I invest money in his fund. Part of his written proposal stated that his fund "couldn't implode." I guess hedge fund implosions are on the minds of other prospects out there. It's not just me.
Of course, I wondered about the appeal of investing in a fund that felt that the fact that it woyuld not "implode" might be considered a positive attribute. Isn't that a bit strange? Would that make you feel confident in investing in such a fund? It certainly didn't attract me.
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