Unskilled Positions

A running back is an athlete who carries the ball in football. The running back position is considered a skill  position, requiring intelligence, physical strength, agility, and the ability to elude equally intelligent, athletic, strong and agile opponents who bear down on him with a serious intent to harm him as he attempts to move the ball downfield for his team.

There are some 150 players professionally employed as running backs on teams in the National Football League. Most years, fewer than ten of them carry the ball twenty times a game and rush for a thousand yards during the season. They are the elite players. They make ten million or more a year. The rest average a lot less, but even the most mediocre running back makes a million bucks a year.

Why? Because the American public is so mesmerized by the sport they will pay the equivalent of a year’s college tuition for season tickets to the eight games the teams play on their home field, and the ad revenues generated from the more than sixty hours a week of television programming plus another hundred or so of sport shows dedicated to analyzing the game runs to over a billion bucks a year.

The hedge fund business is very similar. There are some six thousand hedge funds operating in the global markets. A half dozen or so make a lot of money for their clients. The overwhelming majority of them make enormous amounts of money in fees for the managers–ten to fifty million a year is not uncommon for a mediocre fund manager–while their clients are lucky if they still have their original capital after five years.

Why? Large institutions and very rich individuals need to diversify very large sums of money and, in recent years, have been eager to experience the cachet of being hedge fund investors (good cocktail talk), and are happy to pay hefty fees on the assumption that their managers will actually earn their fees.

It is impossible, because, like the rest of the world, these investors chase after performance by putting their money into funds that have shown good performance in the recent past. The result? Gobs of money flows into these large pools of capital at the top of the market. What follows is predictable. Investors lose money, but the managers get oversized fees anyway.

From an article in The Economist, Jan 12, 2012 :

…it is hard to think of any clients that have become rich by investing in hedge funds… Indeed, since 1998, the effective return to hedge-fund clients has only been 2.1% a year, half the return they could have achieved by investing in boring old Treasury bills. ..

As a class, hedge funds are categorized as Large Speculators by the agencies that track their investment positions. When the majority of Large Speculators concentrate their investments in an asset class, the upmove for that class is coming to an end. At present, these guys have record positions in stocks, stock options and stock futures. They also have record positions in bonds and bond futures. (E. W. Financial Forecast, October 2012). I’d be terrified if I owned stocks or bonds right now.

The Economist article concludes:

…Investing in hedge funds will enable some lucky managers to enjoy an early retirement on their yachts. It will not enable pension funds to eliminate their deficits.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.


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