Juggling Dynamite

Over the past 12 years as the credit-bubble induced secular bear has continued to grind through the stock market, the potion of choice for many wealthier investors has been to add hedge funds to their portfolio. CNBC likes to call these funds the “smart money.” I call them “hubris funds’ in my book, reflecting the fact that so many of them are full of highly paid MBA’s, CFA’s and PHD’s with lots of confidence and very weak risk management skills. In many cases just when you need them most, their complex strategies turn out to be not hedged at all, but levered and full of losses.

This is not to be too hard on those fiduciaries who are trying their best to honestly execute a discipline and do the right thing for their clients. This has been a very challenging year to date. My firm has positive returns to date, but modest and we are sure-as-hell not feeling cocky in this environment. But numbers tell an enlightening tale about all that hype of “smart money” trading and their talk of always finding attractive things to buy no matter what the macro-climate. Below are some snap shots of their performance, see the whole listing here from the Hedge Fund Research web site.  Read ’em and weep.

Here is a helpful big picture view of the S&P 500 since 1997 when animal spirits and unfettered leverage went system-wide ramping into the tech bubble, the credit bubble and in the past three years, the moral hazard bubble.

Source: Cory Venable, CMT, Venable Park Investment Counsel Inc.

I am presently reading an excellent and entertaining book on all of this that I highly recommend to everyone who has, or plans to have, some wealth amassed for the future. It is called The High-Beta Rich, How the manic wealthy will take us to the next boom, bubble and bust, by New York Times bestselling author Robert Frank.

Frank spent two years tracking some 200 families of America’s noveau riche who made millions and billions in the bubbles outlined in the chart above.  The trouble is that ‘quick-come on big leverage’ has meant ‘quick-go in spectacular collapses’ in many cases.  The real life stories are fascinating (albeit common). 

The broader thesis of the book is how our economy has become more vulnerable and volatile as wealth, and frequently mismanaged, fleeting wealth, has pooled into a few and away from average households.  One of my favourite lines from the book comes when Frank is telling the story of two tough and scramble New Jersey brothers who grew up on the cargo docks and made themselves billionaires by building up the family docking business, here is Frank:

“Even the toughest dock workers in New Jersey, however, couldn’t prepare them for the wealth managers of Wall Street and the hundreds of millions of dollars they lost in just a few months.”

Listen to this interview clip for more.

More valuable journalism from CBS 60 Minutes, this time on the systemic failure to prosecute Wall Street. Two high-ranking financial whistleblowers say they tried to warn their superiors about defective and even fraudulent mortgages. So why haven’t the companies or their executives been prosecuted? Steve Kroft reports.  See the Part I clip here.   Part II is here.