John Wiley Publishing's Dummies Guides have sold very successfully in recent years. But not everything in life is so easy that untrained people should try it after a quick read. Medical Triage for Dummies, Emergency Management for Dummies and Circumcision for Dummies are just three titles that I hope are never written.
During the dot-com boom, I had a lot of friends who had previously had little interest in investing, yet thought they were superstar investors. For fun, I liked to ask them about Cisco, a company they all seemed to be investing in. They usually could tell me that Cisco made routers, but when I asked them to explain what a router does, they would hem and haw sort of like Tucker Bounds explaining Sarah Palin's national security experience.
With egos and wallets a bit deflated, things were quiet during the early 2000's. But a couple of years later, it seemed that everyone became a real estate expert. Unlike dot-coms, which were believed to be smoke & mirrors, real estate was tangible. You could live in it or rent it out. And none of us knew anyone whose property values had ever gone down. So the taxi drivers who had given you stock tips a few years earlier were now talking about how they were flipping properties with no money down. That's usually a good sign that the bubble might soon pop.
But, after all, we were all just amateurs and had access to only basic financial information. Oh to be one of the financial gods running a hedge fund. Hedge funds were run by the best and the brightest and had access to the inside scoop from the street. So, when a hedge fund manager whose pedigree includes an HBS degree and eight years at Goldman (or Morgan Stanley or JP Morgan) tells you that they employ a multi-strategy, thematic approach using market neutral securities hedging in a systematic macro yet event-driven approach with various degrees of leverage to ensure that they always, always, always made money in bull or bear markets, it seems believable. After all, for 2% of the NAV plus 20% (or more) of the profits, they had to be good.
That's why it's come as a surprise to many people (particularly those in the mainstream media) that many of these funds have struggled in this volatile market. Today brought news that the Ospraie Fund is shutting down after losing 27% of its value. This comes on the heels of announcements of the closing of $2 billion Andor Capital, Turnberry Capital Management and the fund run by financial reporter Ron Insana.
So, am I saying that these hedge fund managers are dummmies? Not at all. They are among the best and the brightest in the financial community. But, those who believed that these financial wizards could engineer the risk out of investing? Those are the latest iteration of the same old dummies who believed that tech stocks would change the fundamentals of the market and that housing prices never drop.
btw - in case you're wondering the images below are titles from real books. Scary.
