In our last post, we touched on the issue of whether there is a material segment of the hedge fund industry that has sold products with redemption terms that only work if markets are in good shape.
If you weight this, second argument more highly - we obviously do - then the implication is that hedge funds should offer redemption terms which will work when times are rocky, not just when it's plain sailing and everyone is making money.
"Your strategy may have, say a 25% chance of going bust in the next decade, but that's OK for a fund manager -- because a 75% chance of being lucky enough to run the table and pocket enormous sums of cash and be considered a prince of Wall St is a good bet. And then even when the black swan event does happen, you've probably already pocketed a lot of cash AND you really won't be blamed anyway, since plenty of others will be in similar straits and many of your customers will accept the explanation that your strategy was perfectly sound but that nobody could have been expected to predict the financial equivalent of being struck on the head by an asteroid. Which is what Viniar is claiming -- and I don't think it's stupidity, it's spin. Although it's possible that he believes his explanation--sometimes you can deceive others more effectively if you're deceived yourself."
Food for thought.
Hedge fund operational due diligence.