4 ms·

LTCM was a special bunch though, especially because of the astounding amount of leverage at play. There are certainly more modern examples like Pershing Square

• vostok 10y ago
  To be fair,I would pretty pissed off if I invested with Bill Ackman and he followed standard risk mitigation and diversification strategies. The idea is to get concentrated exposure to stuff that's not just equivalent to being long the whole market. That's why nobody invests all if their money with Pershing Square. It's just not what the fund is designed to do.
  • zeusk 10y ago
    The idea of "hedge" fund is also to hedge their bets and preserve capital in-case of downside. Ackman doubled down on his biggest losing bet (Valeant), actually more than quadrupled down by taking up exposure to options that were almost worthless when he unwound the position.
    • vostok 10y ago
      The "hedge" part of "hedge fund" is a misnomer. The defining feature is that they're lightly regulated.
      • zeusk 10y ago
        Historically, "hedge fund" was named after a private fund that did pairs trade by shorting one security as they long other to hedge their losses in a downturn or broader market decline. Modern hedge funds use futures, swaps and derivatives to the same effect, hedge in "hedge fund" is in no way a misnomer and being lightly regulated is a direct consequence of them being limited partnerships which are not open to public or non accredited investors and not the other way round.
• mcguire 10y ago
  The economic models of risk that most hedge funds use are...odd.
• qq66 10y ago
  The lack of risk mitigation is perfectly rational because of the lack downside. If a manager creates a hedge fund that has a 10% chance of making $1 billion and a 90% chance of losing $50 billion, he's got a 10% chance of making $200 million and a 90% chance of making $0. That means his expected return is $20 million for a fund whose expected return is -$44 billion.
  • viraptor 10y ago
    I'd like to understand what you mean by those numbers. Why does the manager's numbers for gain/loss differ from the fund's?
    • mcherm 10y ago
      Because the fund manager's downside is capped at 0. Bankruptcy heals many ills. Also because of the survivor effect: if 3 hedge funds do poorly and one does incredibly well, guess which fund manager gets interviewed on the news. And don't be surprised if the analysts decide that half of the funds were incredibly successful (since 2 of the 4 were really in a different category and shouldn't​ count).
      • viraptor 10y ago
        I'd put downside capped at 0 and bankruptcy in different groups. At the very least you lost time. You probably also had some investment in the business. Downside capped at 0 would be some opportunistic investment using spare cash with a gain or 100% return guarantee.
        • Retric 10y ago
          But, you get the carry of some percentage which should pay for your time.
    • hammock 10y ago
      2 and 20. His scenario is a little contrived though