Hedge Funds Suffering:

The hedge fund industry appears to be showing some cracks with a few more revelations of mega losses coming to light. The industry has been growing at a very rapid pace and not all these guys can be geniuses. The original idea was to in fact be hedged but that seems to have gone by the wayside as all of theses new managers fight for returns they have in many cases gone to extreme positions.

Many hedge funds are now pure speculations on the direction and are making huge bets in a very narrow segment of the market. Amaranth Capital Partners is a good example of what can go wrong, the fund lost $6 billion, or 2/3rds of the entire fund, on a bet that natural gas would move higher. Amaranth has now had to close down as it can on longer operate.

These funds tend to have sophisticated investors many of which are institutional who are supposed to be aware of the risks, but I don’t think any of them would have expected a fund to have concentrated the portfolio in only one or two positions. This is not money management more like gambling. How do these guys justify their fees if they don not have a legitimate strategy and a discipline to follow it. Many of these hedge funds charge huge fees as much as 20% of the profits on the notion that they have a sophisticated strategy that justifies the fee.

Many managers are getting in to the hedge fund business because the potential revenue is so large which is the wrong reason to open a fund business. Do not be surprised to see a number of other spectacular blowups in this industry there have already been over 1000 hedge funds of 7000 or so that have shut down in the past two years. Unique genius is not that common.

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