Anyone can be a Hedge Fund manager it seems

This is an amusing piece from Dean P. Foster (of Wharton) where by using humour he points to an important point- hedge funds need to be regulated.

Scarcely a day goes by without another story of some large hedge fund blowing up due to bad bets. While many of the latest hedge fund casualties are linked to the subprime mortgage crisis, investors should not be lulled into thinking that the problem will be solved once the mortgage mess is mopped up.

Hedge funds are risky for another reason. It is extremely difficult to tell, based on past performance, whether a fund is being run by true financial wizards, by no-talent managers who happen to get lucky or by outright scam artists.

He then shows how easy it is to become a hedge fund manager and make huge returns by riding on his luck. The logic is simple:

take a position that yields high returns with high probability and extremely poor returns with low probability, and keep your fingers crossed. Credit default swaps are one example, so are bets on interest rate spreads. Such strategies are risky but not fraudulent; the manager can always argue that his opinion about the odds differed from the market odds (he was simply engaging in arbitrage).

The suggestions are common stuff- should be registered with regulators, should publish their financial statements regularly etc.

Nice and simple.

3 Responses to “Anyone can be a Hedge Fund manager it seems”

  1. A must read case study for all finance students « Mostly Economics Says:

    […] must read case study for all finance students I had posted about an article by Dean Foster a while ago where he talks about regulating hedge funds.  On […]

  2. Richards Hedge Funds Blog Says:

    I think 30% of the hedge fund industry would move abroad if the US government ever required regular financial statements and full registration. I don’t think it will ever come to that though, it is too late to implement it.

    R

  3. escomieri Says:

    hell yea ! you are right 😉
    page found on google

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