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August 27, 2007
Bulletin: Hedge Funds are Risky
The skittishness about hedge funds among some pension fund investors cited in today's Wall Street Journal is one of the more optimism-inducing things I've seen in ages. Less money raging into the asset class will help returns, weed out some weak funds, and generally do wonders for the hedge business.Mind you, some investors still haven't really figured out the whole hedge fund thing:
"I'm not a major hedge-fund proponent," [Dan Gallagher of L.A. City Employees' Retirement System] says. "And the perception among some of our trustees is that hedge funds are very volatile and that there is risk there."Say it ain't so.
More seriously, if people are only now figuring out that hedge funds are all about taking on different kinds of risks -- sometimes more, sometimes less -- then what rock have they been living under? Otherwise, what's the point?
As an aside, it is interesting how people cited in the piece mention "diversification" and "uncorrelated returns" as a reason to invest in hedge funds. While that is, of course, true for the most part, there is an important caveat, in that, as recent events have (re-)shown, funds' correlations tend to become high and positive during market crises. Given the relative rarity of such moments that likely won't trouble most smart investors, but it's will worth reminding oneself (and one's trustees) on a regular basis.
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In my experience, most pension fund administrators have very strict rules governing transparency from hedge fund managers they choose to invest with. Also, when folks mention risk where hedge funds are concerned, what exactly do they mean? Different hedge fund strategies may include more risk than others whiles some hedge fund strategies are more risk averse.
Risky? How about the fees the venture guys take? Just remember that the failure rate for venture funded companies is above 90%.
Can you imagine the media attention the HF industry would receive if 90% of all hedge funds lost investors money and then blew up? Hilarious...
What's also amazing is the recycling of people by the venture guys. One look at Valleywag or Techcrunch verifies that. Beer trucks sponsored by Sigma Nu full of Web 2.0 and startup gypsies that drift from one useless company to the next. Stuff like flitter, flutter,twitter,quitter -- crap -- I quit trying to figure that junk out a long time ago.
What's that old saying again about glass houses?
Knowledge and diversification have an inverse relationship--the more diversified you are the less you know about each individual investment, necessarily.
The whole point of a hedge fund is opacity, it's like making sausage.
IMPORTANT UPDATE FOR ANY TRUSTEES WHO MAY BE READING:
- Hedge funds also charge a lot.