Twas Ever Thus

One of the greatest top ticks of all time comes from the October 1968 edition of New York Magazine (emphasis mine):

“You’ll hear fabulous success stories- like the hedge fund guy who made 20 per cent on his money in a week, for seven weeks in a row. ”

“If, then, our hypothetical hedge fund can make 50 per cent on its money in a year- a modest figure the way most hedge funds have performed– the fund manager’s 20 per cent of the take amounts to $1 million.

“To be sure, hedge funds are an extremely intelligent way to manage money, as those fortunate enough to get in on the early ones have learned.”

Only these stories of sophisticated risk management with eye-popping returns turned out to be nothing more than story telling. The market would top less than two months later and the bear market that followed would wipe out a lot of money and goodwill hedge funds received from their investors.

From Sebastian Mallaby’s More Money Than God:

“Between the close of 1968 and September 30, 1970, the 28 largest hedge funds lost two third of their capital, Their claim to be hedged turned out to be a bald faced lie; they had racked up hot performance numbers by borrowing hard and riding the bull market. By January 1970, there were said to be only 150 hedge funds, down from between 200 and 500 one year before; and the crash of 1973-74 wiped out most of them. The Securities and Exchange Commission gave up on its campaign to regulate a sector that was now too small to bother with, and in 1977 Institutional Investor magazine ran an article asking where all the hedge funds had gone. As late as 1984, a survey by a firm called Tremont Partners identified only 68 of them.”

Morgan Housel had a great description of the career cycle of money managers.

  • Manager has a winning streak.
  • Investors pile in, hoping winning streak will continue.
  • Manager puts new investor money into sub-par ideas. Returns drop.
  • Investors pull money out.
  • Manager finds new opportunity.
  • Few investors are left to enjoy it.
  • Manager has a winning streak

Because money chases performance, even some of the best money managers of all-time have delivered terrible returns for their investors. All the technology and investor education in the world won’t stop investors from piling in at the top and piling out at the bottom.

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