A reader writes [edited]:
I work at [name hedge fund withheld] and have been thinking about the recent news of hedge funds blowing up.
Investors were hurt, unnecessarily, because of the failure of the hedge fund manager to adhere to sound money management principles. Such failure leaves a fund vulnerable to a probable equity bust.
Apparently, some very large and supposedly “very sophisticated” hedge funds have no clue about basic money management–position sizing, risk of ruin, how to set stop loss position exits. They don’t seem to be aware that the greater the amounts they risk on any one trade relative to their capital base, the greater their risk of ruin. Or, worse, they don’t care.
Contrary to general perceptions, size and previous success are no guarantee against failure due to lack of sound money management discipline. Multi-billion dollar hedge funds are vulnerable unless they exercise this essential discipline.
M replies: Exactly right. Such a failure is a violation of investors, in my opinion. Any hedge fund manager who takes too much risk can go bust. The markets are ever uncertain, and a manager has to know and respect his limits.
Investors, before they invest their hard-earned money, ought to have a right to know exactly what sound money management principles the manger intends to strictly adhere to.
And there ought to be penalties, other than simply closing the fund, for managers irresponsible enough to break these principles–to break their promise to their investors.