September 30, 2006
Fund Of Funds Cheer At Amaranth Fall
There are a few hedge fund managers out there who couldn’t stop rubbing their hands with glee when Amaranth collapsed. No, they weren’t born-enemies of the promoters of Amaranth they are only shrewd businesspersons. These fund of fund managers have only one small regret – that the collapse did not create enough turmoil! A scared client can bring in more business, they believe. I know all this sounds a bit too much and even I had to pause awhile to get my bearings.
Well, getting back to the topic, quite a few hedge fund managers believe that scandals can be good for sales. Amaranth's problems show the dangers of trusting your money to a single manager and vindicate a more diversified approach. And what does that mean – that funds of funds are finally coming into their own. The Amaranth fiasco will encourage more pension funds and other nervous investors to buy what the funds of funds are selling.
But that doesn’t mean that things at the hedge fund market are all hunky dory, far from it. It has become a problem of plenty – plenty hedge funds and fewer options to make money. So, the inevitable happens – reduced returns and greater difficulty making money. Some experts believe this is the reason for the Amaranth fiasco. The company was apparently motivated by a mixture of frustration and greed, and decided to bet on gas prices, with disastrous results.
One thing that’s quite obvious from this entire episode is that we should no longer expect our hedge funds to make double-digit returns. So the next time you decide to invest in a hedge fund, study the market very carefully and try not to invest in one that is too greedy.
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Your analysis might be correct for the majority of FoF, but a goodly number (maybe the majority) of Amaranth's capital appears to have come from FoF. So...
Posted by: Josh | Oct 2, 2006 1:18:39 PM
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