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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
by qq66 9y 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 9y agoI'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 9y agoBecause 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 9y agoI'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 9y agoBut, you get the carry of some percentage which should pay for your time.
- hammock 9y ago2 and 20. His scenario is a little contrived though
- zeusk 9y agoalso, LTCM managers were partners in the firm.
- zeusk 9y agoYou're kidding me, right? What do you think "hedge" fund means? Good luck on the next job if you lose a firm $44B