Saturday, January 15, 2011

Surviving Hedge Funds Harbor Unrealistic Hopes

Some hedge fund managers can admit the futility of their business models.  Good for them.  They close up shop when they figure out they can't beat Mr. Market:

Galle Global Macro Partners LLC, the hedge fund founded by Sri “Wije” Wijegoonaratna, a former Fortress Investment Group LLC executive, is shutting down about a year after it started.

Other hedge funds cling to extremely unrealistic expectations for the year ahead:

Hedge fund managers and investors are increasingly bullish about the industry's prospects for growth and returns in 2011, according to a survey by Barclays Capital conducted at the firm's inaugural Hedge Fund Symposium in New York.

Good luck navigating a market pumped by quantitative easing.  The hedgies' publicity machine convinces other institutional investors - who have learned nothing, of course - to go along for a ride chasing impossible returns:

The New Jersey Division of Investment invested an additional $40 million in a Centerbridge Partners distressed credit hedge fund.

Completely unnoticed to those know-nothing investors, hedge fund strategies gradually converge on an event horizon approaching ultimate stupidity:

Hedge funds are crowding into more of the same trades these days, amplifying market swings during crises and unnerving investors. Such trading has stoked market jitters in recent months and helped to diminish the impact of corporate fundamentals on stock-market movements. Droves of small investors have reacted by pulling money from the market, questioning its stability and whether fast-moving traders are distorting prices.

I should thank the people running hedge funds, along with the folks running the institutional money that sustains them.  It gets easier and easier for me to take the other side of the thundering herd's trading philosophy as time goes by.  Give me fundamental deep value for the long term, plus a little merger arbitrage, option writing, and fixed-income yield enhancement.  I'll leave the multivariate, high frequency, global macro nonsense to people of less ability than me. 

Nota bene:  Alfidi Capital is not a hedge fund.