Apologia

10Mar08

Failure is a hard place to start. Right now, I am failing to get into business school. In my defense, this probably has a lot more to do with applying too early in my professional career than with some other, more personal shortcoming.

A biography in buzz words: ivy league, cynic, software, hedge funds, frustration.

Let me be clear that I don’t want to manage investments or run a fund or do any of that crap. Those people are talented but also a little insane. I’m much more interested in the general industry itself. I’m going to start with a little education.

The catchall “loosely regulated private investment pool” is slightly ominous-sounding without actually giving the reader a concrete idea of what’s going on. A hedge fund is really a gentleman’s agreement of sorts. You give your friend a few thousand bucks to invest because she has a good idea. She makes some money and you let her keep some of your profits because, after all, she had the insight to pursue this investment idea in the first place.

Now grow that idea. Your friend takes money from lots of people, maybe even friends of your friends. These people don’t know each other, so the gentleman’s agreement needs to be shored up with guarantees as to how much your friend will be paid, what kind of investments she can make, and how long she can be expected to hold those investments. Your friend, now having the trust of several investors and more money to play with, pursues riskier and more exotic ideas. The mutual fund manager down the street can’t do this because all of his investors could pull out on fairly short notice.

(other things your friend does that mutual funds can’t: borrows money, shorts stock, and trades difficult-to-value assets like art, real estate, and wine)

By virtue of your friend being one of the few sophisticated, Western investors playing in a poorly-understood market, she is very successful. Other private citizens follow suit. The strategy gets tapped out and some other genius comes up with a good idea. Investors move on. The cycle repeats.

The current landscape is not dissimilar from a workshop full of alchemists, vainly pursuing almost any formula in hopes that it will turn lead into gold. In spite of the fact that the industry only contains a couple hundred major players, that returns across the board are generally not better than the stock market, and that life among the thousands of low AUM managers (under $50 million, a pittance for any mutual fund) is short and cruel, the media seem to have concocted a fairly unrealistic idea of hedge funds as glamorous and successful right until their inevitable blow up.

It’s hindsight bias, the desire to construct a consistent story out of unrelated data points.

I tried to get into school because I don’t think I can get paid to explore these ideas short of doing asset management M&A or heading up the MFA. From here on out, I’ll try to post regularly, chronicling my progress in applying to school while also commenting on relevant news and other bloggers. I doubt I’ll have any real insight; truly I hope it is my readers who will educate me in the long run.

Thanks for reading,
-A.C.M.

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Tags: business school, ego, hedge funds