Do Hedge Fund Managers Have Any Skill Or Do They Just Play a Crap Shoot?

Question

A handful of them have lost billions and billions of dollars over the past few weeks.

When they lose money, they don't compensate anyone. But, if they make money, they keep 20% of the gains.

Hedge funds seem like the perfect way for the investment manger to just make some huge crazy bets. If the bets pay off, he gets to keep 20%. If the bets fail, he just throws up his arms and says "shucks" while investors are left holding the bag.

Answer 1

Most of the skill required is to be a risk taker, they gamble with your money. Go to JustManageIt.com and find out how to manage your own money.

Answer 2

Most rich people are not in hedge funds. They would rather preserve wealth rather than increase it several fold. Now there are several millionaires that want to be billionaires and that's what hedge funds prey on.

Now how can let's say 500 millionaires create a multi-billion dollar hedge fund? Well they do margins which are basically loans. $1 can move $1,000 dollars or some such thing. The margin holders are responsible for that $1,000 so they can owe a whole lot more than they put into it. The hedge fund is set up so the people are not responsible for the money no more than the stock investors of a company are responsible for any lawsuits on the company even though they technically own the company. That's why these hedge funds can declare bankruptcy when things go bad.

Since they can make millions without suffering these massive losses thanks to bankrupcy, they try for the biggest gains possible. The higher yields require greater risk.

Answer 3

The thing about these guys is that they are very, very smart. After all, the people who blew up the hedge fund Long Term Capital Management were Nobel Laureates. And that's the problem. They are over confident; they fall under the spell of illusion of control. When risks pay off, the natural inclination is to take bigger risks. We are all subject to these challenges as investors. And since you have noticed the big pay-day they can have when they win . . . well, it's natural that they're risk-seeking kind of guys.

Regulators are requiring hedge funds to report subprime-related losses by the end of this month -- so look out for a lot of bad news in early September.