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Sunday

Hedge fund blow up?

Financial armageddon is apparently nigh. The shocking news is that some hedge funds had a bad October. Others had a great month and some that were nicely up YTD are now up less. Despite putting up several years of great performance with few negative months the penalty should be severe for such a disgraceful transgression.

Adding to the catastrophic headlines is that one hedge fund trader, out of thousands in London, is being INVESTIGATED. If the regulators find there is one bad apple, then all the apples are bad, right? And as for some well-known equity long short managers having a rough October, if giving back a minute fraction of your cumulative returns is enough to give investors the "jitters", then they should not be investing in anything, including cash or government bonds.

I hope you survive the global economic crisis that has apparently been precipitated by these dastardly, swashbuckling, burn your grandmother for a basis point hedge funds. I am off to Antartica where hopefully the long arm of the SEC, the FSA and the Feds cannot reach. I have been using the enormous leverage kindly provided by brokers to build a secret ice palace. Besides it's almost summer down there and the Antartican market is an untapped alpha source.

Sarcasm aside, yes October was rough for some funds. It was also plain sailing for many others. Anyone long volatility or with a short bias should have done well. High frequency traders will also be ok as well as anyone sufficiently diversified. I am writing this instead of jumping out of a window because I did ok too. Of course the stock indices and lemming like "mutual" funds did poorly but this won't generate the same kind of headlines, will it?

Many pundits, most of whom have never bought a stock in their life and certainly have never invested in a hedge fund, often speculate that wholesale redemptions from hedge funds are imminent. Professional investors know a superior product. For some funds, now shown to have been swimming naked in an outgoing tide, there may be withdrawals, but the money will just be reinvested in better hedge funds.

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