Hedge Your Bets

February 14, 2007

Slate's Daniel Gross lists five reasons why he thinks there’s a hedge fund bubble, and that bubble is close to bursting. It's required reading for anyone who is thinking about choosing a hedge fund over a well-diversified mutual fund portfolio.

For the Internet, residential real estate (now officially popped), and alternative energy, there were always telltale signs of bubbleness.

Those same signs suggest that our next bubble is already here, and it's … hedge funds.

1. Public investors are getting really excited when insiders sell, believing they're being cut in on a great deal… The whole idea of hedge funds is that they are exclusive and that the massive rewards—2 percent management fees and 20 percent of the profits—flow to the guys who own it. The advantage of running a hedge fund, as opposed to a mutual fund, is that you don't have to tell the public how much you've made or shed any light on precisely how you did it. So, why are some of the sharpest tacks in the business willing to sell out now and sacrifice all the advantages inherent in the hedge-fund structure?...

2. Everybody and their mother is getting into the business… Now, we've got politicians, diplomats, and policy wonks, who are frequently the last to know about any important private-sector trend, starting hedge funds…

3. As the naive newbies are plunging in, the successful early adapters move on to the next big thing… Spectrem Group, which tracks the spending and investing habits of the very wealthy, in January reported that truly, filthy rich (those with household net worth of more than $25 million) have recently cut back sharply on their hedge investments...

4. In the late stages, the investment craze crosses over into the broader consumer culture. In the summer of 1929, stock promoter John J. Raskob's article in Ladies' Home Journal, which urged everyday Americans to build leveraged portfolios, was a clear sign of the top. In the 1990s, the appearance of theStreet.com money maven James Cramer in ads for Rockport shoes proved to be a similar omen...

5. My portfolio is in turnaround. If there's one group of businesspeople that is even slower on the uptake when it comes to hot trends than politicians, it's Hollywood executives. Which is why television shows are often excellent signs that a bubble is popping...

LINK

0 COMMENTS: POST A COMMENT