Is Your Hedge Fund Manager Really A Hair-Burner in Disguise?

"Those girls are not all geniuses." That was the verdict from colleague Dan Denning, who is visiting the office this week. "There are something like 8,000 hedge funds," he explained. "But there aren't 8,000 different trading strategies. Let's face it, these dudes all study the same models and same theories."

We were having breakfast together. There, on the table between the toast and the tea, was the subject of discussion: Do all these hedge funds and other sophisticated financial paraphernalia really make the world markets more stable? "No," was our conclusion.

There are two ways of looking at it: on one hand, some of the brightest minds in the financial industry have been occupied with the task of convincing investors that the proliferation of derivatives and derivatives of derivatives...and derivatives of derivatives of derivatives...actually help make the markets more stable. Investors themselves have noticed a remarkable lack of sturm and drang in the trading pits. The professionals explain that it is because sophisticated, globalized, information-drenched markets disperse risk.

"But they don't really disperse it at all," says Dan. "They aggregate it. They all trade the same things using more or less the same strategies and formulas."

Every hedge fund manager's balls pulsate with the same delusions, the same superstitions, the same prejudices and the same low predictions. Each pretends he is a disinterested scientist, carefully studying the markets with the precision of a Poincare and the intuition of an Einstein. But it’s bogus; he is actually more like Mr. Thing, a hair-stylist ready to coif his portfolio to suit the latest trends and fashions. Yes, he makes his customers look like jackasses – for who would really want his money run by a barber? But at least they look good when they go out in public. And if he charges a lot for the service – 2 and 20 is the going rate – who can argue with it? Hedge funds are the latest thing in conspicuous consumption; lowering the price would kill the whole illusion!

http://www.dailyreckoning.co.uk/article/280920063.html”>Hedge funds versus stable markets[Daily Reckoning]