Here are a couple more to jog your memory: Julian Robertson’s Tiger Funds were devastated in 2000. Both Aman Capital and Marin Capital sank beneath the seas in 2005. Amaranth Capital lost $5 billion in a single week in 2006. We still don’t know the extent of the losses at John Corzine’s MF Global; the latest estimates are approaching $2 billion. All these were seen as geniuses with a Midas touch when their just-passed couple of years attracted billions. Then there are the more recently feted geniuses like John Paulson, the 28th richest American, who did splendidly from 2007 to 2011, in which year his flagship fund went on to lose 40% for investors. (And an additional $700 million in the just-passed 2nd quarter of this year.) Before you heed this Siren’s call, remember, a 60/40 index fund split beats hedge funds!
Hedge funds take such massive risks because it pays well to do so. It may not benefit their investors but it lets their managers, to note but one example, buy a string of thoroughbreds, a $30 million place in Aspen, another in Southampton, another on Lanai, and of course a little 28,000 square-foot pied-a-terre on the upper East Side – even if investors lose everything. Until we can get Congress to close the carried interest loophole, this kind of insane trading will continue. Worse, their every move will be lionized.
The rise of the Internet has coincided with the failure of financial journalism. Something appearing on a blog written by some nut-case living in Mama’s basement gets picked up by once-responsible news organizations and passed along as if it were fact. Then it gets picked up by others citing the better-known news organization as the source. Many an investor has made intelligent, well-researched decisions only to see them dashed by something Soros or Einhorn or Paulson say. Though not necessarily what they do. Many times, they’ve used the bully pulpit of television and other media to tell others what to do. (Of course, talking up the stocks they own only to sell into the resulting buying frenzy is not unique to hedge funds; Wall Street has been playing that game for more than 100 years…)
If you really want a “hedge” in the market, may I suggest you consider going long one sector you believe will perform best and short a different sector you see as a laggard? You could simply buy, say, the SPDR Health Care ETF (NYSEARCA:XLV) and sell short, say, the Utilities sector (NYSEARCA:XLU). Or you could select one of the many long/short mutual funds or ETFs. In the latter category, I particularly like the ProShares RAFI Long/Short ETF (NYSEARCA:RALS). And if you seek something that provides sector rotation for you when conditions change, you might take a look at the Huntington US Equity Rotation Strategy ETF (NYSEARCA:HUSE), which does that work for you.
Hedge funds absolutely create wealth – for their managers. Do it yourself and create wealth for… yourself.
Joseph L. Shaefer is the CEO and Chief Investment Officer of Stanford Wealth Management, LLC, a Registered Investment Advisor. A retired General Officer, he spent 36 years of active and reserve military service, the first six in special operations, the next 30 in intelligence. He is professor of Global & Security Studies (Intelligence, Counterterrorism, Illicit Finance, etc.) at American Public University / American Military University. He analyzes the Big Picture first, then selects asset classes, sectors and individual securities.
Disclaimer:THE FINE PRINT: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.
Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month.
We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about. © J L Shaefer 2013