How Not To Run A Hedge Fund: Geoff Grant Edition


I like this.


Most amusing little snippet in FT’s Alphaville:

Grant Capital Partners is being shut down. This hedge-fund manager wind-down is brought to you by Geoff Grant, one of the same gentlemen behind Peloton Partners’ enormous fall.

Fun fact from the FT’s Sam Jones:

Grant Capital eschewed the asset-backed securities and heavy leverage that led to the downfall of Peloton and focused on highly liquid instruments such as currencies, bonds and interest rate derivatives.

While funds that specialise in trading mortgages have enjoyed some of their best returns in the past two years, global macro funds have floundered.


Most amusing indeed. And good evidence that timing is the most important part of any investment strategy.

Which brings me to a lovely piece of research The Economist did some years back. Over the century or two that we’ve got decent historical financial records they tested out two basic investment strategies. The first was, each year (I think, memory doesn’t oblige, it might have been decade) to invest in whatever had been the previous year’s best performing asset class. Stocks, bonds, real estate that sort of level of asset class. The second was to invest in the previous year’s worst performing asset class.

Over a couple of centuries the differences were truly enormous. No, I can’t remember the actual numbers but it was along the lines of, if you’d started out with £1,000 then one strategy left you with about three pennies, the other with more wealth than there is in the world.

And yes, of course, it was investing in the previous year’s worst performing asset classes that made more money than there actually is.

We can offer a number of explanations for this. The most obvious being simple reversion to the mean. Sure, some asset classes outperform others at any one time. But they’ll all revert back to mean returns among all assets. Well, they will at some point at least. A second is that markets are known to over-react. Slumps in value are usually lower than the fundamentals suggest as the boom times usually seem to over value things.

But that calculation was indeed done and those were the results. And then we get hedge fund managers who, having been badly burnt with MBS, CDOs and the rest, then eschew those asset classes in their next adventure only to see them revert to mean. Or perhaps they were just oversold. That’s gotta hurt, doesn’t it?

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