Remember when hedge funds hedged?

This subject has worried at me like a sore tooth for some time. I always understood that hedge funds were named thusly because they figured out complex cross-trading positions to reduce risk by being able to profit from the market going either up or down. That made sense to me. So I have been puzzled by the steady stream of reports of funds going under because of over-weighted positions that went south, with no apparent counter-positions to shore up the downside of their bets. I figured that it was just because I'm unsophisticated.

So it was a great relief to see my doubts articulated by an apparently more sophisticated observer, The Stalwart's Joe Wiesenthal.

The Stalwart: Hedge? Funds
See, when I think of a hedge fund, I think of a fund that has identified some discernible arbitrage opportunity, arising from investor bias or regulatory incongruity. Either that, or the fund's strategy is the practical application of some obscure finance paper, perhaps embedded into some software that trades automatically. This view, however, is a little too idyllic it would seem, since a lot of funds are simply uni-directional bets on a certain asset or derivative. In the case of the recent Bear Stearns fiasco, some are actually claiming that the fund wasn't a hedge fund because there was no, you know, hedge.

Since there seems to be no shortage of dumb money investors willing to go long on people who talk a slick game, I'd like to announce my new fund: The Lee Distad's Professional Opinion Clueless Audacity Han Solo ("Don't Tell Me The Odds!") Fund. Initially I'm looking to raise $300 million in capital. My investment plan is to allocate 5% in myself, and allocate the rest to playing long shots at the horse track, pump & dump schemes in worthless penny stocks, and furthering the careers of Columbian strippers supermodels. All of this will be proportioned according to complex proprietary algorithms that, frankly, none of you would understand. My primary hedge will be stockpiling all the empty deposit bottles and cans that my frat brothers management team drain. Even if all of our other positions go south on us, the deposits on the recyclables should return at least 0.5-1%, which is more than anyone got back out of Long Term Capital Management when they tanked.

**The content contained in this blog represents the opinions of Mr. Distad. This commentary may contain forward looking statements and definitely contains sarcasm and rude sentiments. This commentary in no way constitutes a solicitation of business or investment advice. If you're looking for stock picks from me, look somewhere else. Really, what were you thinking? If you came here because you were trolling Google looking for someone to help you get rich in only twenty minutes a month, you need to seriously re-evaluate your worldview. This blog is intended solely for the entertainment of the reader, and the author, and not necessarily in that order.

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