Warning to Hedge Fund Manager Wannabe's

Discussion in 'Professional Trading' started by Swish, Feb 5, 2004.

  1. Swish


    Recently, a good friend of mine who managed a hedge fund committed suicide - largely over the losses he'd incurred over the past year. He was consistently profitable prior to 2003 for many years (5+).

    Many friends and acquaintances were invested in the fund and a self-propelling downward spiral began to occur in which my friend lost his psychological edge, investors became increasingly frustrated with him, and he became more and more isolated.

    My purpose is to communicate this info to the ET community to emphasize the following:

    1. Trading decisions are impacted by your psychological state - it's tough enough to extract yourself from a hole in trading - but it's even worse when you're carrying the emotional load of losing other people's money.

    2. Even though investors in your hedge fund (or any other type of "pseudo" hedge fund may be long term friends or family members - just about everybody gets nervous when their investment trust in you is compromised.

    3. When a fund "goes south", lawsuits often soon follow, probably wreaking havoc for a considerable period of time after the hedge fund is closed and even dissolved. These lawsuits often come from people who you thought would never sue you - thus driving the psychological impacts even further.

    4. Investors in hedge funds must know of the risk for loss - and it must be beat into their heads continuously.

    5. If what happened to my friend happened, then I assure you it could happen to just about any of you. My friend was a seasoned professional trader who was very emotionally stable.

    6. I've never understood why folks want to invest other people's money - Yeah there's a profit motive - but statistically a very high proportion of hedge funds eventually fizzle or bomb out after having a great run. At a minimum, it is now my firm belief that hedge fund managers should never invest funds for family members or friends. He must retain a dispassionate distance from his investors and be able to interact with them on a 100% professional level - which is not possible with those he is close to.

    All that said, I write these things to communicate the potential downside of such ventures. I can tell you that the family of this trader is now suffering far more (and will be for years to come) than the suffering incurred by the investors.

    Still in mourning,

  2. shit man.

    condolances to you for losing a friend

  3. 0008


    Why didn't your friend make a false statement to their clients and then run away? There is a guy on the FBI fugitives page did so!:D
  4. CalTrader

    CalTrader Guest

    This has happened more than once - I have seen it through the years. Some of the people were hedge fund managers and some were traders. These incidents should be a clue to anyone wanting to get into this business that it really is a very tough line of work and you really need to be a super strong personality to succeed - and to know when to throw in the towel. IMHO very few people make good traders or fund managers and it really takes a unique individual to excel.

    Sorry to hear about your friend.
  5. Swish, sorry to hear about your friend. We take the following precautions to try to prevent such a situation because of course anything could happen:

    1. When considering a new investor, make sure the PPM is filled out completely and thoroughly. Follow a procedure similar to the "know your customer" rule.

    2. Once you assess the investor's net worth / liquidity, absolutely refuse to take more than 25% of that person's net worth. We constantly turn down additional investments and beat it into the investors' heads that they could lose all of their investment, even though we are more conservative than any typical tech mutual fund.

    3. Avoid the hot money crowd. Occasionally, a friend of a friend will come recommended to us. We ask them about their hedge fund experience and how often they switch. If they're evasive or defensive, don't take them.

    4. We probably have a different approach than most. We recommend that an investor put in an initial chunk and then wait to see how it goes. If they're happy, then we encourage them to invest additional funds up to our self-imposed limit.

    Clearly, these measures won't prevent someone from suing us anyways, but at least the damage is mitigated.


  6. Swish,

    Thanks for sharing some very important lessons from what has no doubt been a difficult time for you. I had personally avoided going the hedge fund route despite some opportunities in the past mostly because I treasure my independence, and the potential monetary rewards from managing OPP didn't seem to justify frofeiting it. But you raise a whole new and far more serious range of concerns that will ensure that I remain my only money management client going forward.

    Thanks again and very sorry for your loss.

  7. On what basis would an investor sue the manager over losing their money?

  8. I would think the most common cause of action would be breach of fiduciary duty, assuming the manager was not a crook. Taking on too much risk, not following the approach set forth in the offering memo, having other funds or accounts that did much better, blowing stops, substance abuse issues, taking too much time off, etc., anything of this nature looks dubious if the fund has blown up and opens the manager up to claims of negligence. I'm not saying these are winners, but they could get past a motion to dismiss and put you in front of a jury.
  9. This story is soooo sad.

    My condolences completely.

    In 1985 I started out as a young stock broker and I saw first hand these kinds of stories.

    They are real and tragic.

    I urge everyone to take this business very seriously and not some game that is played for fun.

    :( :( :(
  10. Can additional clauses be added to the agreement to protect the manager from any and all losses regardless of the reasons of the loss?

    #10     Feb 5, 2004