176 comments on Hedge Funds, Hurricanes and Energy Markets
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176 comments on Hedge Funds, Hurricanes and Energy Markets
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Moe, thanks for posting the buy signals. Speaking to your point about these funds hiring experienced traders, I was just thinking that maybe most of these funds really have a structural incentive problem more than an issue of talent. The may know how to trade well enough, but the traders don't get paid to manage their risk (unless they're one of the top guys). If they bet it all and win, they get a massive payout and if they bet it all and lose, they move on to the next fund. One the funds high water mark is breached, the incentives become even more skewed. You want to keep betting till you're back in the green cause you're not getting paid if you're not.
If they were trading with their own money, like we are, bankruptcy risk has real consequences. I don't think anyone blows up their fund deliberately, but where's their downside? Not sure if traders at Ospraie had any of their own money in the till....do you know if they did? I heard some of the newer funds require that traders drop some cash in to keep them there and keep their trading reasonable. Anyway, thanks again for the informative posts.
In every half-decent hedge fund senior traders have own money in the fund.
I doubt very much that it's enough money to make it hurt. I was referring more to the rank and file (guys running their own books but not the entire fund). The head guys usually are pretty well established and filthy rich. Putting in 1 or 5 or 10 million if you have 200 million in the bank still doesn't mean you're putting yourself on the line. One of the lessons that most of the intelligent guys at the top learned (since LTCM) was to not bet their net worths on their fund's performance. Dwight Anderson, for example, has another 3 funds that he's currently running. I'm sure he's utterly heartbroken over losing this one. I like your point about us only hearing about the bad ones, and Amaranth certainly fits that mold, but the shocking thing about this fund was the fact that it was run by a guy with a fairly clean reputation and a respectable pedigree (as far as hedge funds go anyway). He doesn't seem to be the one who would take outsized risks, so it's surprising to see a blowup there. Nobody will know for sure what really happened for months (years?), so this is all just speculation at this point. Whatever happened, I'm sure there will be tons of stories about what went wrong this time.
Then again, no investor will bet his own net worth on one hedge fund. You might have confidence in your employer, enough to buy some stock but would you really invest all your savings in it?
Imagine you're looking to invest in a high-risk-high-return fund, would trust one where everybody handling your money is in, all-or-nothing? That's not an investment vehicle, that's a sect.
Good point, but if I was the CEO or the third guy from the top, I don't think it would be unreasonable for equity holders to expect that my firm's bankruptcy should be mine as well. Only real way to align incentives. Given the size of most of the large hedge funds, I can see how your argument makes sense if you're a small fish in a big pond, but if you're running a book at a mid-sized or small fund, you're what...3-5 guys away from the top (maybe even less). If you're the head trader of a major strategy, you're probably one guy away and have an incredible amount of leeway to do whatever you like. You should be held accountable personally for the results. The fact that you're not is what leads to reckless betting and bad risk management. In any case, if I had enough to invest in these funds, I would only go in if the head guys were putting a MASSIVE amount of their own net worths into the fund. That's the only way to make sure they're properly motivated to manage the bankroll and to take measured risks. This isn't always 100% effective (see LTCM), but at least I know that they'll be obsessing over the markets the way I do when my own money is on the line. The other strategy is, as you suggested, to diversify your hedge funds and have a little in each...a blowup here or there could be offset by a star performer elsewhere.