Hedge Funds -- We're Off to See the Wizard!
A recent WSJ article ("Race to Rate Hedge Funds Begins in Heavy Fog," September 28, 2005; Page C1) set me off on my regular rage against hedge funds. The article's author, Scott Patterson, was just reporting the news, but the whole subject gets me going. So, here's my rant, set to quotes from the Wizard of Oz.
Auntie Em: Now you go feed those hogs before they worry themselves into anemia!
Some investors, fed on the frenzy of the tech bubble, just can't get enough of losing money chasing hot returns. To them, investing is more like gambling. And, the new game of chance is hedge funds.
Professor Marvel: Professor Marvel never guesses. He knows!
Ever met with a hedge fund manager or salesman (never seen a hedge fund saleswoman -- a credit to womanhood)? They spout all kinds of statistics and mysteries of investing that are sure to bring you great riches -- all fact, no speculation. But, there's a void of statistical evidence to support any superior performance of hedge fund investments. How could there be since they invest in the same markets as everyone else? Not even mentioning the high fees extracted by hedge funds. It's just hamburger served up a different way.
Dorothy: Weren't you frightened? Wizard of Oz: Frightened? Child, you're talking to a man who's laughed in the face of danger, chuckled at catastrophe, and sneered at danger.
Ever wonder where these wonderful hedge fund folks came from? Well, they're the same ones who were pumping tech stocks and managing failed mutual funds anf IPOs five years ago. Before that they were pushing real estate limited partnerships and oil drilling programs. Sure, these deals all made economic sense -- for the promoters. This fearless crowd has laughed in the face of bankruptcy, chuckled at subpoenas, at sneered at regulators. Lion-hearted courage.
Wizard of Oz: You, my friend, are a victim of disorganized thinking.
Wizard of Oz: Pay no attention to that man behind the curtain.
How hedge funds get away operating in a cloak of secrecy is beyond me. The door is beginning to open a little and the government is beginning to pay some attention. But I'm afraid the SEC may be a little outmatched by the hedge folks. I recently saw the annual letter from one hedge fund of a new client (about to be former hedge fund investor). There was so little information about the fund's actual holdings and investment strategy. The returns information was presented in a non-standard way and there was evidence of data mining. The horror was that this investor has nearly 90% of his wealth in this one hedge fund. And, the hedge fund manager is a doctor! And, I should be doing brain surgery.
Wizard of Oz: I can't come back! I don't know how it works! Good-bye folks!
Think disaster can't happen? Just reflect back on Long Term Capital Management which spiraled out of control in 1997 and threatened to extinguish investors' wealth and jeopardize the nation's financial institutions. LTCM wasn't being run by rookies. "The fund’s principal shareholders included two eminent experts in the "science" of risk, Myron Scholes and Robert Merton, who had been awarded the Nobel prize for economics in 1997 for their work on derivatives, and a dazzling array of professors of finance, young doctors of mathematics and physics and other "rocket scientists" capable of inventing extremely complex, daring and profitable financial schemes." (Le Monde Diplomatique, November 1998). But, when the dust settled, Good-bye folks! was all the investors heard.
Tin Woodsman: What have you learned, Dorothy? Dorothy: Well, I - I think that it - it wasn't enough to just want to see Uncle Henry and Auntie Em - and it's that - if I ever go looking for my heart's desire again, I won't look any further than my own back yard. Because if it isn't there, I never really lost it to begin with! Is that right?
Sooner or later investors will wake up to the fact that to find smart investing one needn't look any further than the basics -- risk management, disciplined savings, and diversified investing. There's no hocus pocus. There's no great investment Oz -- despite what the hedge fund managers would tell you.
Auntie Em: Now you go feed those hogs before they worry themselves into anemia!
Some investors, fed on the frenzy of the tech bubble, just can't get enough of losing money chasing hot returns. To them, investing is more like gambling. And, the new game of chance is hedge funds.
Professor Marvel: Professor Marvel never guesses. He knows!
Ever met with a hedge fund manager or salesman (never seen a hedge fund saleswoman -- a credit to womanhood)? They spout all kinds of statistics and mysteries of investing that are sure to bring you great riches -- all fact, no speculation. But, there's a void of statistical evidence to support any superior performance of hedge fund investments. How could there be since they invest in the same markets as everyone else? Not even mentioning the high fees extracted by hedge funds. It's just hamburger served up a different way.
Dorothy: Weren't you frightened? Wizard of Oz: Frightened? Child, you're talking to a man who's laughed in the face of danger, chuckled at catastrophe, and sneered at danger.
Ever wonder where these wonderful hedge fund folks came from? Well, they're the same ones who were pumping tech stocks and managing failed mutual funds anf IPOs five years ago. Before that they were pushing real estate limited partnerships and oil drilling programs. Sure, these deals all made economic sense -- for the promoters. This fearless crowd has laughed in the face of bankruptcy, chuckled at subpoenas, at sneered at regulators. Lion-hearted courage.
Wizard of Oz: You, my friend, are a victim of disorganized thinking.
Wizard of Oz: Pay no attention to that man behind the curtain.
How hedge funds get away operating in a cloak of secrecy is beyond me. The door is beginning to open a little and the government is beginning to pay some attention. But I'm afraid the SEC may be a little outmatched by the hedge folks. I recently saw the annual letter from one hedge fund of a new client (about to be former hedge fund investor). There was so little information about the fund's actual holdings and investment strategy. The returns information was presented in a non-standard way and there was evidence of data mining. The horror was that this investor has nearly 90% of his wealth in this one hedge fund. And, the hedge fund manager is a doctor! And, I should be doing brain surgery.
Wizard of Oz: I can't come back! I don't know how it works! Good-bye folks!
Think disaster can't happen? Just reflect back on Long Term Capital Management which spiraled out of control in 1997 and threatened to extinguish investors' wealth and jeopardize the nation's financial institutions. LTCM wasn't being run by rookies. "The fund’s principal shareholders included two eminent experts in the "science" of risk, Myron Scholes and Robert Merton, who had been awarded the Nobel prize for economics in 1997 for their work on derivatives, and a dazzling array of professors of finance, young doctors of mathematics and physics and other "rocket scientists" capable of inventing extremely complex, daring and profitable financial schemes." (Le Monde Diplomatique, November 1998). But, when the dust settled, Good-bye folks! was all the investors heard.
Tin Woodsman: What have you learned, Dorothy? Dorothy: Well, I - I think that it - it wasn't enough to just want to see Uncle Henry and Auntie Em - and it's that - if I ever go looking for my heart's desire again, I won't look any further than my own back yard. Because if it isn't there, I never really lost it to begin with! Is that right?
Sooner or later investors will wake up to the fact that to find smart investing one needn't look any further than the basics -- risk management, disciplined savings, and diversified investing. There's no hocus pocus. There's no great investment Oz -- despite what the hedge fund managers would tell you.
posted by Sherman L. Doll, CPA/PFS at
1:12 PM
