21 June 2010

The problem with hedge funds

A new book that enthusiastically supports the idea of hedge fund investing may suggest to the non-specialist investor that these funds offer a road to riches. But while we do not want to stop anyone from reading a good tale in an entertaining book we want to point out a major problem for hedge fund investors. This is the regrettable fact that most of them do not really understand the risks that are involved in selecting funds. The marketing of Hedge Funds is often performed out of sight for the real end investor as intermediaries (in private banks and pension funds) are acting on a discretionary basis while bearing little of the ultimate risk themselves. Given the substantial cost of investing in Hedge Funds investors should employ independent advice before committing their funds and not rely on the judgement of those that have a financial interest in the transaction.

PS The title of Sebastian Mallaby's book is 'More Money than God'. This comes shortly after the confession by Lloyd Blankfein - CEO of Goldman Sachs - that he was 'doing God's Work'. Is there any connection between these two references to God?

How often do you have to check your portfolio?

An advertisement for a mobile phone application giving you instant updates on your portfolio is testimony to the increasing short-term orientation of today's financial markets. This is not the result for a real need expressed by investors but the outcome of a sales-driven culture that dominates the financial sector and seduces investors into excessive trading which creates a serious drag on the performance produced by investments.
Prices fluctuate from second-to-second and looking at these gyrations will only confuse investors. A sound investment strategy should instead focus on long-term targets and reduce costs and risks. Real-time quotes may have entertainment value but contribute nothing to the achievement of satisfactory investment results.