When Hedge Funds Don’t Hedge

Here’s a tragic story about a hedge fund manager who lost $100MM in client assets:

“Li said in the letter that he made a series of “aggressive transactions” over the last three weeks to make up for poor returns in December. He said he bet on stock price options, predicated on the broader market rising. But stock indexes fell, causing the huge losses along with several undisclosed direct investments, according to the note.”

This isn’t “asset management”.  It isn’t “hedging”. It’s gambling. So much of the “asset management” world has become a big casino where managers try to “beat the market” and justify their absurd fees.  What they’re really doing in most cases is charging investors a high fee to take more risk.

Good asset managers don’t need to “beat the market”. They need to help their clients generate returns that are consistent with their financial goals. This casino mentality on Wall Street is tragic and destructive. The sooner people realize that “investing” is actually the act of “reallocating your savings” the sooner they’ll start treating their portfolios like their actual savings and less like a get rich quick scheme. And when more investors demand this type of prudence the managers will necessarily change and stop acting so much like drunkards at a blackjack table and more like the prudent caretakers they should be.

Related:

• 4 Wall Street Myths that Hurt Invstors
• Understanding the Total Portfolio Approach