The hedge fund industry has been battered by the popular press for the last few weeks. The meltdown of the sub-prime mortgage industry has been blamed on two things — lax credit standards and of course hedge funds. Many funds have taken it on the chin and losses are mounting a daily basis.
The reality however, is that the sub-prime meltdown is the tip of the iceberg. In my opinion the reports about hedge funds are going to get a lot worse for hedge fund managers and their investors in the weeks and months ahead. The main reason is because too many people are masquerading as hedge fund managers and they are not truly hedge fund managers.
These pseudo-wannabe managers simply do not have the skill sets to navigate this volatility and therefore they are getting slammed. These “expensive mutual funds” are getting whacked, whacked and whacked again by the volatility that’s occurring in the marketplace and they offer little hope of recovering the losses when things settle down ( and they always do settle).
Just to be clear in order to be operating as a hedge fund you need to be “hedged”. You need to have a series of investments that are longs, a series of shorts and most critically, a strategy in place that protects against or takes advantage of volatility when markets rise and when markets fall. That’s the key to this whole game. That’s where hedge fund managers add true value. It seems to me that a lot of these so-called hedge funds are offering little or no value at this time.
Over the last couple of weeks people have been sending in emails asking how important is prior experience in managing money when starting a hedge fund. The questions are quite frankly mind-boggling. What level experience do you need to have to set up a fund? Do you actually need to have worked for a money manager? My response is always the same: would you like a doctor to operate on you who has never been in the operating room before or has no idea what’s going on with the medical procedure or surgery? That’s the answer. It sounds trite, it sounds silly, and it sounds maybe even foolish because nobody in the world would have a doctor operate on them if the surgeon didn’t have experience with the surgery. However why everybody in the world thinks that they can manage money – is beyond me. You can’t read a book and understand everything. You need to see firsthand how things are done, you need to experience real live situations in the market to understand how markets move.
Remember this. Whatever goes up, comes down and you need to be able and prepared to make profits when markets go up and also when they go down and the only way you can do that is through experience.
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