Investors and Hedge Fund Risk
Everyone should read Barry Ritholtz’s the honest and forthright description of how small hedge funds must interview for investors. He is exactly right about how the interviews go. I have many similar stories, but he has told it so well already, I will not try to add any more examples. (Yes, I know my readers will find that unusual!!)
The impact of investor behavior is a major theme at "A Dash." We are developing the thesis that much of what happens in markets is an extension of the principles studied in Behavioral Finance. Even if individual managers hope to reject the short-term pressure for performance, the market may push them to ever riskier strategies. Investors may have trouble finding funds that control risk, because most of them have been starved out of existence.
There are always plenty of successful funds with great records. What one does not know is how the record was compiled. Were these the lucky survivors of the process described so well in "Fooled by Randomness" or was there an underlying process with intellectual rigor and integrity?
Barry is right. Investors get what they seek and deserve.
But there is more. Investors who push for short-term performance, without understanding risk, determine the menu of choices available to everyone else.