The confidence trick
By
Charlie Corbett
Thu 04 Oct 2007
Fund managers and annual performance reports brim with confidence, no matter how much money has been made or lost, but where does this leave the humble investor?
Fund managers are always confident, especially hedge fund managers. In the good times they are "confident that our returns will outperform the benchmark", in the bad times they are "confident we can recoup our losses".
Annual performance reports positively brim with confidence, no matter how much money has been made or lost.
Where does this leave the humble investor? We are living through a time of extreme volatility. One day the ASX/200 is at an all-time high, the next it suffers the biggest one-day fall since Warren Buffett was in nappies.
Now is the time for hedge funds, in particular, to excel; to show us investors quite how uncorrelated they are to the rest of the world. And yet the reality is quite different. The vast majority of hedge funds were dragged down with the rest of us poor saps.
"This time has been the most difficult time for the entire hedge fund industry since 1998 . we remind investors that even absolute return hedge fund managers make a loss from time to time," one listed hedge fund told its investors last month, having just announced losses across six of its funds.
That is a particularly conceited statement from a manager you would have expected might have lost a bit of confidence.
I am sure investors understand very well that "absolute funds occasionally make losses", but surely a truly hedged fund doesn't make losses when everybody else makes losses.
What is the point in investors paying all those performance fees in the good times, when everyone else is making money, only to suffer the same fate as everybody else in the bad times?
Perhaps I'm being a bit too cynical, but I think perhaps a few supposed hedge funds may need to look up the word 'uncorrelated' in their dictionaries.
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