I made a mistake several years ago, but I didn’t know it at the time. It wasn’t a dreadful mistake, but one which I thought I would share with you to perhaps give some guidance and solicit some comments.
About 5 years or so I was sold on purchasing some shares (are they really shares?) of a fund of hedge funds. I will admit right off the bat that I didn’t know what it does, what it did, or how it works. I trusted my financial advisor as he told me that it was a great way to diversify my portfolio.
Last October/November I decided to look at every single one of my investments and decide if I needed to sell the position and rebuy (to take the tax loss) or to hold, or to simply sell. I decided that this fund of funds needed some investigation.
I called my financial advisor (I have a new one now, the old one who sold me on the fund of hedge funds washed out a few years ago) and asked him what this thing was exactly. He didn’t know. I asked him “who do I call to find out?” Apparently the guys who run these things are walled up in bunker-buster proof concrete buildings, far, far away from any method of communicating with their clients. After getting stonewalled a few times I just said something to the effect of “well if you can’t explain this thing to me, and I can’t ‘click’ on it to see what is inside, and I can’t call the guys who are running the damned thing, I don’t want it”. Thus began the unwinding procedure.
I was fortunate in that my fund of hedge funds had a pretty good return over the years (who the hell knows how, I sure don’t).
Last December I got the forms to cash this thing out and signed them. I am used to just calling up someone and saying “sell” or “buy”. Anyway, I signed and mailed the forms. A few weeks later, I received a letter from the fund of hedge funds people that may as well have been written in sanskrit. The managers of funds of hedge funds can and do communicate from on high!
I called my financial advisor and asked him what the letter meant, and he said that they are “unwinding my position”. “So, they are getting me my money?” “Exactly”.
That was in early December. It is now April and I have finally been notified that my ca$h will be deposited into my account within the week. Four MONTHS later!
Never again will I invest in a vehicle that I:
1) Do not understand
2) Can’t call someone to “buy” or “sell” it (I like liquidity)
3) Can’t “open up and see inside” – in other words, I want to click on it and see what it is and how it is doing.
I suppose that the wholesale investor is treated much better than a lowly retail investor such as myself, but still, if you open your vehicle to retail, you may want to at least invest in one or two people to deal with the uneducated (such as myself) on these matters. Or not?
You’re lucky,very lucky. What I thought when I saw the first part of the posting was ” oh shit,this guy got screwed”.
It is much easier to get money by conning people, than by adding genuine value. The best commentary on the situaation was by Nicholas Taleb, the Black Swan man. It is not reasonable to expect outsize returns; the question one must ask oneself is “what makes me think I’m smarter than everyone else?”If you don’t have a convincing answer ,you’re not.
Warren Buffett has saved himself much grief by not buying anything he does’t understand.
From the moment I heard of them I thought hedge funds were a bad idea. They are predicated on the concept that you can eliminate variability from the market. It’s not investing, it’s gambling. Even in the case where this is very smart gambling (e.g. counting cards), it’s still a perversion of the market which leads to new and interesting failure modes. These things have already been central to 2 financial crises (LTCM in the late 90s, and the current craziness), and I think this is hardly the end of the damage they’ll cause.
I don’t think your experience in hedge funds is unusual. I think most people who are invested in them don’t know how they work. This is a recipe for disaster, a classic speculative bubble. When people let their judgement get checked at the door while investing, nothing good can come of it. People start investing in silly dot-coms with no reasonable chance of profitability, but they see everyone else doing the same thing, which drives up the stock price, which makes it seem like a good investment. Until people get scared, re-apply their common sense, lots of stocks get sold, the stock price tumbles, and people get screwed. This pattern happens again and again, every time the key is people ignoring common sense and rationality when investing.
Modern portfolio theory holds that you can create your own portfolio that tracks the S&P average with as few as 8 randomly selected stocks. You can really screw up the portfolio if you are non-random in selection. This theory was developed by using historical data and randomly generating 8 stock portfolios. It has worked historically.
Of course, past performance does not gaurantee future performance.
While it is hard to screw up by buying several funds, you can still screw up if the funds are selected non-randomly. But remember funds are run by Really Smart People and therefore often under-perform the market because instead of investing randomly they invest intelligently.
Always have an exit strategy. Only buy liquid assets. An asset is liquid if you can sell it at the prevailing market price any MTWTF between 8 and 8 except MLK day of course. Therefore only buy assets traded actively on a market you can access.
I keep a portion of my assets in wine and paintings. That way I can appreciate them even if they don’t appreciate. I have also framed a few stock certicates and hung them on the wall. It makes the buy and hold strategy more enjoyable.
I like the wine and paintings strategy, Sol.
I had this to a small extent with a leveraged loan product I bought. When the markets froze I couldn’t sell it even though I had been assured (on a recorded line at etrade) that it was 100% liquid. I did lose maybe 20% of my investment but it was relatively small and like you I learned a lesson I will never forget which is not only not to buy something that you don’t understand but also not to buy anything in the least fishy. Glad you are getting your $ back
Dan,
Do you know the asset classes your fund of funds invested in? For example, public equity based strategies are generally liquid, whereas credit based strategies can be very illiquid. If you are getting your money out after four months you likely dodged the worst performing strategies, many of which have gated their investors for years. Credit strategies were the worst siren song – “delivering equity like returns with bond like risk” for years…..until they lost everything.
“never count your money when you’re sitting at the table”
Good Luck.
Let us know when you get the money.
Robert Schwartz – surprisingly, I got it last night. But you are right about the not counting your money comment.
Wade – I honestly don’t know what the fund of funds was invested in. I am sure that I was told five years or so back when I bought it, but have no clue today.
Sol wrote:
“I have also framed a few stock certicates and hung them on the wall. It makes the buy and hold strategy more enjoyable.”
Did the same for a different reason. I had purchased company stock in a startup I was working for. By the time I was finally able to sell mine to another sucker (and, of course, buy his) in order to reify the tax loss, I had turned $2550 into $0.10. What that certificate means to me is a kind of memento stultitiae. That is, I was, at least once, enough subject to the suasions of school spirit that I bought into an investment that met none of the criteria for a real investment: safety of principal and a mathematically established likelihood of a return on investment. And I KNEW it wasn’t an investment at the time. I got that stock to be one of the guys. I writhe thinking about it, 20 years later. I writhe confessing it here. But it is a useful test when thinking about other homes for my money, and one I apply when I glance up at the worthless paper. Wish I could have learned it for $25.50.
No on the wine, but I keep a certain amount in guns, which I enjoy shooting even as you do your vintages. Based on reasonable knowledge in purchasing, I am assured they will be monotonically non-decreasing in value. Unless they are confiscated.
Congratulations Dan. Pour yourself a cold one.
I think I will take it neat on this one, Robert.