Special Situation Investing

Monday, January 29, 2007

Hedge Hogging

I just finished reading Hedge Hogging by Barton Biggs the other day. The book was excellent, well worth the read. It is quite succinct but manages to cover numerous investment topics and I think most investors would take something from it.

While it is primarily focused around hedge funds, the book is also an excellent overview of the investment landscape. Value, growth, momentum, charting, gold, macro-economics, the book pretty much covers all the major areas. It is put together using a number of case studies which really drew me in. Not working in the investment field I am always curious how the pro's approach things. What I found from reading this book is that they are not as organized or all knowing as I sometimes give them credit for. In fact, they are very much pushed and pulled by their investors to the point that it may impede their long-term performance.

If anything this book strengthened my view that in spite of the vast number of hedge funds, mutual funds and other investment vehicles out there, there are still inefficiencies in the market. That is the fundamental reason why I invest my money in individual stocks instead of just dumping dumping it into index funds.

I will borrow just one quote from the book, which I found to be particularly insightful:

Tim is convinced that hedge funds, because of client pressure, have become obsessed with avoiding monthly declines in net asset value (drawdowns). As a result they employ stop-loss limits and all kinds of risk-control mechanisms that mechanically make investment decisions for them. Most of these decisions are bad. They never fight the tape and brag about how market neutral they are. As a result, they become short-term, momentum-oriented traders. He argues that this creates an opportunity for an investor who uses leverage, is willing to accept volatility, and who is long term in his thinking. "Accept volatility and concentration", he says. "Diversification is an enemy of performance."


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