I read two very interesting observations about hedge funds last week from two very respectable sources. One was in the quarterly letter of Dan Loeb’s Third Point LLC and the other from Oaktree Capital Group LLC’s Howard Marks. Each said, in their own unique style, of course, that there are too many hedge funds, leading to poor performance by most, resulting in disgruntled investors.
Marks believes that the success of few has led to the failure of many, according to a recent Bloomberg article. “The performance of the greatest hedge funds, run by geniuses, created a huge umbrella over this industry, which permitted the other 9,990 hedge fund managers to start hedge funds and command hedge fund fees.” It is true that the allure of riches has prompted many to start hedge funds, but in order to make it, one has to deliver -– a stark contrast to alternative funds and traditional funds. To read the article click here.
In Third Point’s letter, published on the Opalesque site, the firm points out that one of the “few truths” in hedge fund investing today is that “crowded trades are a symptom of the prevalence of copycat investment frameworks practiced by hundreds of funds formed over the past decade to mimic the success of many of their investing-legend mentors and therefore naturally share the same outlooks and biases.” Third Point’s Marks blames the success of the few for the failure of many. To read the letter click here. (You might have to register).
So what does this mean to investors? Well, it’s quite simple: Investors need to do accurate, complete, thorough due diligence on any and all managers they intend to invest with. Investors need to understand their strategy, they need to understand how it is being implemented and they need to make sure that what a manager told them on the day before they made the investment is still true. Ask questions and get answers. I know I have said it before, but the truth remains: It’s your money and you need to know what’s being done with it.
One quick note – the Operations for Alternatives series is expanding to New York City this fall. OFA is hosting a first-of-its-kind hedge fund compliance event. Learn more and register by clicking here. Like all OFA events, everyone is invited and encouraged to attend. I hope to see you there.
Things that drive me crazy
It has gotten to the point that people are calling me up with things that drive them crazy. Recently a dear friend told me that he was using the restroom facilities and in the stalls all around him people were yacking on their cell phones. This would make me crazy as well. Perhaps the solution is an addendum to employees-must-wash-hands signs that reads, “NO TALKING ON CELL PHONES.”