A mug’s game

The investment community is searching constantly for “the answer” on how to be unusually successful.

Firms have employed the cleverest individuals who portrayed themselves as so exceptional that they were worth huge financial rewards.

To demonstrate their talents hedge funds were established. These funds purchased items that they considered undervalued and in turn sold short orders they believed to be overpriced. Thus, there was a double-barreled approach. Yet generally they have not delivered on their promises as the concept was oversold.

What has gone wrong? Investors in exotic markets such as China now blame any failure on improper or incomplete data that should have been apparent at the outset.  Many have relied on computers that would show something out of line based on historical perspective. That failed to show a new invention or circumstances that were unforeseen like the vote in Britain to exit the Euro Market, contrary to all expectations or public opinion polls.

One hedge fund manager said the recent last quarter was the most catastrophic of any period in hedge fund industry, an exception that is unlikely to ever recur again. 

Alas, who would possibly believe that there would be a period of negative interest rates when after a period of investing a bank would charge a depositor for simply holding funds?  That seemed to be an absurd situation.

Then, events such as have occurred in the pharmaceutical industry that made products obsolete, clearly could not have been foreseen. 

Then, there is the risk that in the mining and oil sector, physical hurdles would develop that would impinge on a fire such as happened in Fort McMurray. No fund manager could have been answerable for such things.

A major U.S. investment firm has constantly predicted a big decline in the price of gold and made those predictions after selling short the price of gold. That certainly is of questionable ethics. Other firms have capitalized on a new technical development before the public was aware of the implications. No fund manager should be accountable for this.

A well regarded investment fund hired a chemical pharmaceutical engineer expert to recognize and capitalize early on a product which would soon become widely sold. In Quebec an investment firm with knowledge of hiring trends was sought to predict employment data that would affect central banks’ short-term interest rate policies.

 Thus, even the smartest, most clever fund manager has to contend with unforeseeable developments. Managers will have to cope with many difficulties so relying on hedge funds can be a mug’s game. Too frequently they were wrong, which explains the disastrous performance of hedge funds.

 

 

Bruce Whitestone

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