Wednesday, October 17, 2007

Will Someone tell the Financial Whiz Kids that their House is Built of Cards

Business Week came out with an in-depth article that pulls back the covers on the failure of the Hedge Funds at Bear Stearns. The most troubling part of this article is the broader implications that are not discussed. Most hedge funds in the market are simply emulating each others styles trying to squeeze some excess alpha out of the market while ignoring the risk of multi-sigma events in their plans. There are been numerous articles over the past couple of years discussing that hedge funds were all chasing the same strategies. The management of the Bear Stearns funds was not much different than any other fund on the street… except that they got caught during the crunch in August.

In many ways the Bear Stearns funds were built to collapse, in a situation that is eerily similar to the misguided genius that managed LTCM in 1998. Basically these guys were wandering around the room blind-folded while trying to hit the golden piƱata, while the market acted as a pitbull that attacked anyone holding a bat. The management of the funds at Bear Stearn lacked rhyme or reason, and any plan to survive a downturn.

The article is a must read….
Bear Stearns' Bad Bet