Hedge fund fame and fortune comes with strings attached says new paper
Aug 31st, 2009 | Filed under: CAPM / Alpha Theory, Today's Post
They say blues legend Robert Johnson, considered by many to be the grandfather of rock and roll, sold his soul to the devil to be able to play the guitar. He is said to have “gone down to the crossroads” and given his guitar to the devil, who promptly tuned it for him and provided him with a mastery that made him the legend he is today.
It’s not clear when, or if, the devil ever returned to collect on his debts. But regardless, Johnson could be said to have sold an option to the devil. His success was simply the premium he earned on selling that option. Throughout his career, he should have kept that in mind.
To a great extent, the success enjoyed by hedge funds comes with similar strings attached. Investors and prime brokers hold an option to withdrawal their capital (equity and debt). In exchange, they allocate their capital to the fund, thereby enabling profits for the fund (and by extension, other investors in that fund and, of course, the manager). More…
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[...] “As a result of this sword of Damocles hanging over them, hedge fund managers need to factor in the possibility of investors and/or prime brokers pulling the plug on their fund.” (All About Alpha) [...]