“I don’t care too much for money, for money can’t buy me love.”
So said the Beatles. And yet it seems the message has been understated: not only does money not buy you love, but it goes a long way to destroying it, according to an FT article yesterday.
A Manhattan divorce lawyer, probably as qualified as anyone in the world to speak on the subject, told the FT: “There is no question that a huge inflation of wealth to relatively young people has a disastrous effect on the marriage’s stability.”
And not only are divorces more frequent among hedge fund managers, they are more bitter too, another lawyer said, eclipsing even those notorious prima donnas, film stars. What other explanation can there be for a couple worth tens of millions of dollars arguing over who gets the kitchen dinner service? According to our friendly New York lawyers this stuff really happens.
The solution’s relationship with the cause is as the chicken’s to the egg, in my view: postnups. Like prenups, they are a legal document saying, in essence, “if (which in a legal document sounds like ‘when’, to my ears) we break up, you aren’t getting your greasy little mitts on my money.” Or, more importantly, on the money in my fund, which seems to be the main driver behind this: a growing trend for hedge funds to encourage their staff, if not require them, to sign such documents.
Is this the wrong way to approach marriage? Thinking of the money before the love might be supremely practical, or it might be symptomatic of a lack of faith in the marriage, or some muddled priorities which manifest themselves in many ways, this being just one.
I am sure many of the spouses on the other side of these disputes become spoilt by the lifestyle to which they grow accustomed. I wouldn’t want to imply a disproportionate allocation of blame to the partner working at the hedge fund, casting the stay-at-home spouse as the victim of money-driven, workaholic and neglectful other-half.
The chicken-and-egg analogy is of course a gross over-simplification. Not writing postnups is no solution. There is more to this story, including the break down of family life and the elevation of work above family in many peoples’ priorities, a choice anyone is entitled to make. And this is still oversimplification, as most people working themselves into the ground at hedge funds (or anywhere else) probably do it precisely because they love their families and want to provide the best for them.
It all makes you admire those who can put in such long hours, focus their attentions so completely on markets and making money, and still make their marriages work. Perhaps we will see manager’s successful in this area develop a lucrative business on the side: workshops for hedge fund managers helping them make their relationships work: hedgie headshrinkers.
At least it is good news for journalists occupying the other end of the salary spectrum. There is no point in drawing up postnups for the average hack. Half of nothing is nothing, the kind of maths that acts as a perfect hedge against difficulties in dividing marital assets.

It took me a few moments to get my head around this statistic cited by Bloomberg: one prime broker said 90% the short positions it saw through its portfolio of 130 hedge funds make losses.
My first reaction to this was amazement, followed by relief I’m not an hedge fund investor. What a waste of money, I thought, to be paying some chump to spice up a long only fund with a load of loss-making positions.
Doubtless this will be the reaction of most outside the industry when they read the statistic- the whole story in fact. It is certainly the spirit in which the article, concerned with how woeful Joe Hedgefundmanager is at shorting, was intended. (Perhaps the FSA pays media companies to put out stories like this, to encourage retail investors and trustees to stay away, alleviating calls for increased oversight. Not the most outrageous conspiracy theory I have heard this week…)
On second inspection, though, such failure-rates in shorting can, at least in part, be justified. We are in the midst of a bull market, and many short positions are hedges. This is a point worth a debate of its own: should you be paying such high fees for what is, essentially, a 130/30 fund? Those hedge fund managers that are skilled at shorting, and who use their short books to make money, offer the best value for your fees.) Inasmuch as positions are hedges, you can’t hold it against a manager that a position loses money, as it was never intended as a money-maker.
It ties back in to the point that hedge funds are not about making higher returns than long-only funds at every stage of the economic cycle. Your typical manager will say their fund captures “most” of the upside in bull markets, while “significantly” reducing your downside risk. Hence all the loss-making short positions, which stand a decent chance of making money if the market turns. In fact, these funds the prime broker references are arguably in a good position, going into a period where some expect a turn in the equity market’s fortunes in the near future.
This does not detract from the overall point of the article, which illustrated a point many of us knew already: there are more long/ short managers than good short sellers. It is interesting, however, to see an examination of the reasons for it, and to read admissions from a number of hedge fund managers that they are among those guilty of being hopeless at it.

Simon Nixon thinks hedge funds need to clean up their image, launch a charm offensive on Europe’s politicians and FT readers to get people off their backs. Writing in his Money Week column, he says they should “set up their own equivalent of private equity’s Walker Commission”, putting into effect Angela Merkel’s suggestion of a hedge fund code of conduct.
The incentive for pursuing such a course of action is the fear public attitudes will swing behind the boards of the companies they (those dastardly activist hedge funds again) attack, making it impossible to force changes through. Are hedge funds really so ripe for unpopularity the people will rise up behind company boards? It seems a little far fetched.
Nixon acknowledges hedge funds (activists) are, in fact, good for… well, everyone, “changing the face of Europe, breaking down borders, building stronger companies, revitalising national economies and imposing their own rules on the game,” he says. So what are the politicians’ problems? “They’re not in control of the process,” he answers. After all, hedge funds “aren’t doing anything illegal, they are simply insisting on their rights under existing laws.”
All this, in my opinion, far outweighs the fanciful idea the people will intervene. Attitudes to hedge funds have already softened in recent years as people have become more familiar with what they do, in the UK at least. It is true that “most people only see the huge amounts of money they make and assume it is mostly ill-gotten,” as Nixon points out, but in my experience they think exactly the same thing about company executives: over-paid, under-worked and spending altogether too much time on the golf course. For the rank and file to perceive rich executives of either company boards or hedge funds like this is completely natural, and all but inevitable. The bottom line is people will side with company employees, which may well put them on collision with hedge funds. But this is using the word collision in its loosest sense: some grumbling, some angry editorial and not much else.
None of this is to say hedge fund should not embrace Merkel’s suggestion, but that their motives for doing so are unlikely to be remotely connected to the perceptions of anyone but investors.
Besides, Aima has already come up with recommendations in some of the most contentious areas which tend to be widely taken up anyway. The same is true with the FSA in the UK, for example on the issue of side letters. This arguably amounts to an existing code of conduct, with the US looking likely to follow where the UK leads.

When I see a hedge fund-related story in the mainstream news, I always feel compelled to watch. I know after the first few sentences explaining the main point of the article, (in this instance: credit risk, this season’s most fearsome bogeyman) I will get three times more in generalisations, aimed at those less familiar with this world. But it is always worth seeing how hedge funds are being reported to the general public, and where mainstream economists and politicians fear this murky world will invade the consciousness of the unsuspecting person on the street.
Professor Willem Boyter was on the Channel 4 News (in my opinion, by far the most trustworthy and well-informed news program on the television) last night adding his voice to the (hardly new, but) growing concerns about credit risk.
Credit risk is a concern, and it is legitimate to bring these arguments, which we hear often enough on the inside of the industry, to a wider audience. If people on Boyter’s side of the debate are correct, the fact credit risk has been spread out so evenly does not mean a stronger global system, but a hugely inflated bubble. Instead of the overall burden being shared amongst many and therefore reduced, we can see this as like the tech boom, where there are simply too many people holding time-bombs, and the ubiquitous nature of the carnage will only add to the shock.
The notion that credit is the next bubble is a credible one, in my opinion. A broad asset class including mortgages and current account deficits, which worry everyone, right through to exotic derivatives, credit has grown at an explosive rate. The more exotic elements of credit have yet to face a major test of their robustness.
The major issue is the question of who is holding the toxic elements of the asset class, and here it is easy to make the comparison with tech again. Bubbles are a product of human nature, of the herd mentality and the worry of missing out on a good thing. Many hedge funds are bound to be caught up in the problems if and when they strike, because, as with everyone else, there are many managers who are, frankly, not that talented. Many have piled in to credit because it has seemed like the thing to do. They are no different to the money managers who filled their portfolios with tech names in the 90s: they are making some money out of it now surfing a big wave, but they may not understand the asset class well enough to protect themselves in the event things go bad.
So hedge funds will be held holding worthless paper and losing money, as will, in all probability, insurance companies, pension funds and investors of all other stripes. The good news is there will be plenty of hedge fund managers who anticipate the problems and hold only credit priced favourably, making money out of the misfortune of others. Again, it is rather like the bursting of the tech bubble, which ruined many but launched the reputation of many savvy hedge fund managers who were short the sector.

First UBS and now Bear Stearns. It must be worrying times for banks with large hedge fund operations.
It just goes to show, a massive fund with institutional backing and experienced management is no guarantee of a fund’s quality.

Different rules apply in the hedge fund game. Normal, regulatory ones, for example, do not. Yet, probably because of the vast sums of money at the disposal of hedge funds, sometimes there are more rules than you might think.
It is tempting to suppose the hedge fund universe is a jungle where the absence of regulation means the strong eat the weak with impunity.
Perhaps. But if the hedge fund universe is a jungle then it’s a highly litigious one. Most of the time hedge funds are on the receiving end of litigation. Irate investors complain about fund performance, like back-packers suing their tour operator because they are covered in leeches (“there weren’t any leeches mentioned in the brochure,” they cry.)
Then you get cases like the one between Renaissance Technologies and Millennium Partners. In the hedge fund game, you see, employing staff from a competitor is not fair game because they can take with them proprietary secrets. This is wrong, in fact, to the tune of $20m, paid by Millennium to Renaissance, though this was in no way an admission of guilt.
In most businesses you hire employees for the knowledge they have acquired in previous roles. A chef who learns to cook in one kitchen takes the experience with him to his new employer. He might even cook the same dishes and you would not expect to see the matter end up in court. Some punters, especially fond of this chef’s spaghetti bolognaise, might even follow the chef to his new restaurant, and you would expect to hear grumbles about it from the chef’s previous employer, but probably no more.
The perfect spaghetti bolognaise recipe is not comparable to the world’s most successful trading algorithms, not because they are fundamentally different in concept, but because of the amounts of money involved. On one level an algorithm is different from, say, stock-picking skill, which you could learn from someone at a company and then apply elsewhere. One is a model and the other is a much more subtle skill, meaning nothing without the human touch. But, for a mathematician, once you know the equation that will consistently beat the market, how different is that from being able to ascertain which stocks will do well and which will do badly?
You can see why Renaissance will do everything within their power to keep their trading secrets to themselves. James Simons, head of the group, earned $1.7bn last year. That gives you an idea as to how much power he has at his disposal to guard them.
Hedge funds are unique in this regard. Similar scuffles break out periodically, for example when a Coke executive gets head-hunted by Pepsi, or when one of Tony the Tiger’s closest aides threatens to go public with the Frosties secret formula.
It is still the law of the jungle, with Kellogs, Coke and the world’s largest hedge funds playing the part of the tigers, with the authority to ensure things go their way.
It goes to show regulation is a good and necessary thing at times, even for those who earn billions every year from being outside it.