Wednesday, August 19, 2009

The Golden Wall

The Black Box algorithms and catchy names served their purpose while the good times rolled along through the early part of 2007. Fees and market beating returns for the likes of Pequot Capital and Atticus Capital were all too easy to come by. But the recent turmoil in the markets is turning out to be a tad too much for these folks. Pequot is all but shut down and Atticus announced a few weeks ago that it is returning 95 percent of its investors' money by October. It turns out, according to one source close to Atticus' Mr. Barakett, that “there is no fundamental analysis in the market today” and that the "golden era of equity investment is over”. I am not making this up. This was printed loud and clear on the front section of Financial Times' Market section. Yup, Mr. Barakett even attributed a portion of his performance over the past ten years to luck. So much for the secret Black Box algorithms and hanging in there for your loyal investors when the times get tough. Unfortunately he has no incentive to do so. Why work hard to make up for losses when he won't get paid for his efforts (hedge funds can't collect a performance fee until they get back over the previously set high water mark)? This pervasive psychology along with the rise of the Black Swan theory and Dr. Doom and headlines such as “There will be Blood” in our own Globe and Mail newspaper are what typify market bottoms. We may not be out of the woods yet but this is exactly when you want to be putting your money to work. The golden age may have ended for the fancy hedge fund folks, but Mr. Market will happily continue climbing that shiny Golden Wall of Worry for a long time to come.

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