Top Lessons from Recent Hedge Fund Problems – Introduction

The hedge fund industry is in serious trouble. In 2016, the main market benchmarks went up double digits. On the other hand, hedge funds which are supposed to offer uncorrelated returns to their investors struggled to reach 5%. The number of hedge fund shut down increased and the returns dwindled. This past week, Eton Capital announced that it would shut down. This was a hedge fund managed by a former Goldman Sachs and Robert Rubin alum, Erin Mindich. It was not alone. The previous week, Pershing Square Capital Management, run by Bill Ackman reported a $4 billion loss on its Valeant Pharmaceuticals trade. Other famed investors like Dan Och, Richard Perry, Eddie Lampert, Leon Cooperman, and Michael Novogratz have lost billions of dollars for their investors. In this article, I highlight the top lessons to learn from these failures.

  • No one is an expert

A look at the academic qualification of these men will show that they are tremendously educated people. These are people who have attended ivy league schools that some of us can dream about. Prior to starting their hedge funds, these people worked at enviable positions in their institutions. Most of them were at Goldman Sachs or in some of the leading shops in the United States. This education and experience has not been replicated with their recent performance. Therefore, as a trader, you need to realize that no one is an expert in trading. Instead, we are all trying to become successful.

  • Stay unknown

We all want to be celebrated when we achieve something great. In money management, it is important to stay anonymous and under the radar. The reason these people come to the limelight when their funds fail is that at their prime, they make headlines. They generate headlines when they buy a yacht, outperform the market, buy an apartment, and even a plane. On the other hand, there are highly successful money managers like James Simmons who not many people know about. Despite his success, no one knows where he lives, the cars he owns, and even how his fund performs. As a trader, you should not be tempted by fame. Try as much as possible to remain in the background so that when you fail, you can easily move on to other things.

  • Know when to leave

Investors at Pershing Square Capital have seen billions of their money lost in the Valeant Pharmaceuticals trade. They could not exit because their manager seemed to believe in the company. This is not good. Fact is that Valeant fell from $250 to $10 within a period of less than 2 years. Any investor knows that when a certain level is reached, it is difficult to recover funds. Yet they could not exit. Erin Mindich lost a partly 9% and decided to shut down his hedge fund which was the right thing to do. As a trader, you should know when to exit a trade. Try as much as you can to exit when you think you can’t recover.

  • The easy route

If you have given someone to manage your money, the best thing that you can do is to give him a call and ask for your money back. No matter the historical performance, these traders will often cost you a lot of money in the long run. Instead of giving money to these people, the easiest thing you can do is to take the money and invest in fixed income. You can do this by buying high-grade bonds, mutual funds, and even index funds. Doing this can help you avoid paying fees to traders and even protect your money for the long run.

Top Lessons from Recent Hedge Fund Problems – Useful links:

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