As all of you loyal readers know, I don’t think much of how the media covers hedge funds. It’s rare, if ever, that I think hedge fund stories are — to quote the Fox News slogan — fair and balanced. Sometimes, though, I’m pleasantly surprised to read a story by someone who doesn’t seem to have an axe to grind.
One such piece appeared in The Financial Times last week. The story was about a hedge fund that was already up more than 230 percent this year. In July alone, the fund returned more than 24 percent. The commodities-based fund has been able to take advantage of downturns in the market and earn an excessive rate of return.
I read the article and the first four or five paragraphs really made me smile. All I was thinking was, “Wait, isn’t this what hedge funds are supposed to do?” Some might ask a different question: How much risk did he take to make those returns?
Well, I have no idea. I’ve never spoken to the manager. I’ve never talked to anybody who works for the manager. I’ve never seen documents. I’ve never seen anything at all. But with that said, I am sure that the manager and his team knew exactly how much risk they were taking and new exactly what their exposure was at all times. They understood the upside and the downside before the trades were executed because that’s what hedge fund managers are supposed to do: Make money. Lots of money, shared between the investors and the money managers.
The problem is, that’s not what hedge funds are doing. Over the course of the month, I get between 50 and 100 “performance updates” from funds all over the world. The vast majority of them have had very poor numbers. The numbers are disgusting. Many funds are posting losses in the double digits for the month, quarter and year. It’s just awful.
Frankly, I get sick to my stomach when these “updates” come in because I believe that the investors in these funds have been sold a bill of goods. That’s only reinforced when I read the manager commentary that comes along with the updates. That stuff is even worse than the numbers, which can’t lie. The commentary passes the buck and blames the poor returns on volatility, problems in the credit markets, and everything else under the sun.
I only have one response to that commentary: “Get the hell out of my face with that nonsense.” A manager has one job – to make money regardless of market conditions. If you can’t do that, fold up the tent and go home. Hedge fund managers aren’t asset gatherers – that’s for the mutual fund people. The reason hedge fund managers get paid so well is because they’re supposed to make money, not put up double digit losses and complain about market conditions.
So, my call to action for every hedge fund investor is to look at your portfolios. Figure out if the managers that you’ve invested in are actually doing their jobs, and if they’re not, fire them. It’s that simple. Their job is to make money, period. It is not to manage for mediocrity. It’s not to build a bigger infrastructure. It’s not to have a beautiful office. It’s not to have a massive art collection or their own jets. It’s to make money. Tell them to get out there and do what they are supposed to do or go home.
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