Hedge Funds-Two Other Things.
On Hedge Funds a couple of clarifications. I actually like the hedge fund approach if it is set up in a proper manner, particularly if it has a well thought out investment methodology, pays strict attention to not losing money and uses a limited amount of leverage. I also like hedge funds when I know something about the principals of the firm. The reason I like this type of investing is that when it is performed in its intended form it does align investors and their managers. Investors want to care more about absolute performance and most investment models (read mutual funds) are not set up with this metric in mind.
Also I want to stress that I was not trying to pick on Mr. Healey in my post of yesterday. Like I said then I have no idea what kind of investor he is nor do I know anything about his firm. I used that part of the story to illustrate the risk and rewards of that business. Again I will stress that from what has been reported most of what it cost to bring Sting to Narragansett went to charity.
Hedge funds however can be disastrous when attention is not paid to risk. Doug Kass over at Street Insight discussed this particular subject today. I will share some of what he wrote.
"I have long felt that the hedge fund industry is taking uncommon risks for common returns. In its extreme was Long Term Capital Management, a hedge fund that routinely leveraged its capital over 50 times and failed in 1998. Today, many of the largest hedge funds (and some not so large!) leverage their capital in order to compete in a market that, although it is displaying increased volatility, shows little net progress. The hedge fund industry's dirty little secret is that it has morphed away from its origin of stock picking (A.W. Jones) in favor of becoming nothing more than levered capital pools, or mini Long Term Capital Managements. As such, with so many hedge funds searching for the same alpha (excess returns) and correlated to the same markets, a rapid decline in worldwide equity prices could snowball in the same way that portfolio insurance exacerbated the stock market debacle of nearly 20 years ago." *
Kass should know of what he speaks as he is a Hedge Fund Manager himself. Kass also believes that massive hedge fund redemption will be the third and final leg of a bear market which he believes we are already in. I do not believe that we are in a bear market and see no evidence of massive redemption from hedge funds.
Also I want to stress that I was not trying to pick on Mr. Healey in my post of yesterday. Like I said then I have no idea what kind of investor he is nor do I know anything about his firm. I used that part of the story to illustrate the risk and rewards of that business. Again I will stress that from what has been reported most of what it cost to bring Sting to Narragansett went to charity.
Hedge funds however can be disastrous when attention is not paid to risk. Doug Kass over at Street Insight discussed this particular subject today. I will share some of what he wrote.
"I have long felt that the hedge fund industry is taking uncommon risks for common returns. In its extreme was Long Term Capital Management, a hedge fund that routinely leveraged its capital over 50 times and failed in 1998. Today, many of the largest hedge funds (and some not so large!) leverage their capital in order to compete in a market that, although it is displaying increased volatility, shows little net progress. The hedge fund industry's dirty little secret is that it has morphed away from its origin of stock picking (A.W. Jones) in favor of becoming nothing more than levered capital pools, or mini Long Term Capital Managements. As such, with so many hedge funds searching for the same alpha (excess returns) and correlated to the same markets, a rapid decline in worldwide equity prices could snowball in the same way that portfolio insurance exacerbated the stock market debacle of nearly 20 years ago." *
Kass should know of what he speaks as he is a Hedge Fund Manager himself. Kass also believes that massive hedge fund redemption will be the third and final leg of a bear market which he believes we are already in. I do not believe that we are in a bear market and see no evidence of massive redemption from hedge funds.
*Profiling the 2006-2007 Bear Market, Doug Kass, Street Insight, 8/7/2006 8:16 AM EDT.
posted by CR English at 6:50 PM
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