In Australia, win-lose propositions in business tend to be associated with such things as Alan Bond getting done over by Kerry Packer.
In recent times, however, many Australians have seemingly drunk the Kool-Aid. Many now believe that financial markets are basically win-win situations and arguably have failed to adequately factor in risk.
Take a look at the healthy growth in your superannuation account’s balance over the past three years and you can’t blame them. This Kool-Aid chugging, or as the marketing lingo goes “greater financial sophistication”, is probably best represented by the growing size of the Australian hedge fund industry with its lure of higher than”normal” returns.
Global macro, convertible arbitrage, statistical arbitrage. The menu of strategies reads like the degustation menu from Tetsuyas. All these names are thrown about to persuade investors that in paying a hedge fund manager a 2% management fee and giving them 20% of the gross return, they are getting a great deal for their financial alchemy.
In certain instance they are, but as the hedge fund industry continues to grow and as an increasing array of funds and even governments seek to put their money into alternative asset classes such as hedge funds, there needs to be a greater understanding in Australia of the risks and an understanding that the win-lose game is played at a higher level.
Perhaps Australian investors should look at the bigger loser and winner of the hedge fund business in the United States over the past year to better understand that win-lose situations and risk can still occur on a biblical scale.
According to the upcoming edition of Trader Monthly, the ex-Enron trader John Arnold, who runs Houston-based energy fund Centaurus Energy, was the highest-paid hedge fund manager last year. He made between $1.5 billion and $2billion.
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Here, however, is the lesson for the win-win crowd who have drunk the Kool-Aid. He was apparently on the winning side of the trade that caused the collapse of the multi-billion dollar Amaranth hedge fund last year.
Let’s hope that David Murray’s Future Fund executives are speaking to the right people.