Hedge Fund Hell: Arbitrage in Financials Backfires

[ASusilovic]

....


"You see exceptionally bright guys who set up arb strategies," says Shulman. "And whether it's political risks or short squeezes, those parameters blow up and it's a tough place to be."

Even in ordinary times without government bailouts and unexpected events, when too many funds are chasing too few strategies, the yields start to diminish.

"In the beginning your risk vs. reward is very good, but as more and more people are doing this, it's inevitable that the reward will be a lot less," says Andrew Schneider, founder and managing partner of HedgeCo Networks, a service provider to the hedge-fund industry. "You just have too much money chasing after too few ideas."

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http://www.thestreet.com/story/10475046/3/hedge-fund-hell-arbitrage-in-financials-backfires.html

Still nothing learned from statistical arbitrage meltdown ?

 

[sculptor66]

Quote from ASusilovic:
Still nothing learned from statistical arbitrage meltdown ? [/B]

Why should they? As long as the strategies work, the will collect their fees. When they finally blow up, it's the loss of their investors. It makes perfect sense for the managers to prefer strategies which deliver steady returns over a long time, but have the (hidden) drawback that they will inevitably blow up one day. Game theory 101.

 

[Cutten]

Quote from sculptor66:

Why should they? As long as the strategies work, the will collect their fees. When they finally blow up, it's the loss of their investors. It makes perfect sense for the managers to prefer strategies which deliver steady returns over a long time, but have the (hidden) drawback that they will inevitably blow up one day. Game theory 101.

Most investors insist managers invest a substantial portion of their net worth in their own funds, precisely to avoid this obvious principal-agent incentive problem.

If a manager has 50%+ of his net worth in the fund, he loses far more from a blowup than he would gain in several years of fees.

 

[orange_trad]

Quote from Cutten:

Most investors insist managers invest a substantial portion of their net worth in their own funds, precisely to avoid this obvious principal-agent incentive problem.

If a manager has 50%+ of his net worth in the fund, he loses far more from a blowup than he would gain in several years of fees.

Show me a manager who is 'officially' invested 50%+ in his own fund, and I show you an offshore bank account big enough for three managers to live retirement on...

 

[stock777]

Quote from sculptor66:

Why should they? As long as the strategies work, the will collect their fees. When they finally blow up, it's the loss of their investors. It makes perfect sense for the managers to prefer strategies which deliver steady returns over a long time, but have the (hidden) drawback that they will inevitably blow up one day. Game theory 101.

Correct. That's why they should be forced to reveal this in all offering papers.

WARNING: We will engage in practices designed to maximize our yearly fees and which very likely will result in you losing money when it inevitably hits the fan.

 

[capitalMan]

I invest 90% of my net worth in my own hedge fund and have done so for the past 4 years but I am beating 99% of the hedge funds in 2008 with a 65% return, I hope this doesn't sound hubris, but it's just hard to find managers that are better...

 

[marketsurfer]

Quote from capitalMan:

I invest 90% of my net worth in my own hedge fund and have done so for the past 4 years but I am beating 99% of the hedge funds in 2008 with a 65% return, I hope this doesn't sound hubris, but it's just hard to find managers that are better...

what's your aum?

 

[KINGOFSHORTS]

I am 100% vested in my hedge fund. Well I am the only customer

 

[ASusilovic]

Quote from capitalMan:

I invest 90% of my net worth in my own hedge fund and have done so for the past 4 years but I am beating 99% of the hedge funds in 2008 with a 65% return, I hope this doesn't sound hubris, but it's just hard to find managers that are better...

No, it doesn´t sound hubris. I know a couple of managers beating 99.9 % of the hedge fund industry in 2008...

 

[stock777]

Quote from capitalMan:

I invest 90% of my net worth in my own hedge fund and have done so for the past 4 years but I am beating 99% of the hedge funds in 2008 with a 65% return, I hope this doesn't sound hubris, but it's just hard to find managers that are better...

Congrats. What are you doing with the $3000 now?