Hedge Funds: Game Over

Hedge-Fund Managers Make Midair Pitches

Small-Fry Firms’ Hopes Take Off On Eos Flight of Captive Investors Amid Delicate Time for Industry

—Wall Street Journal

There was an interview in, I believe, Barron’s several years ago, consisting of a roundtable discussion among some of the smartest minds in technology investing.

When the subject came to microprocessors—the chips that drive the computers we all use—and whether to invest in market-leader Intel or perennial Number Two AMD, one of the smartest of the smartest minds at the table said this:

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“It’s game over—Intel won.”

Unfortunately for the magazine’s readers, AMD stock proceeded to triple while Intel languished. In hindsight, his words had been spoken at or near the absolute bottom in AMD’s stock price, precisely because all the bad news about AMD that made it such an easily dismissed company in the pages of a financial magazine had already been reflected in the stock price.

Things could only get better for AMD, and they did, thanks to a new CEO and a new generation of microprocessors that caught Intel flat-footed, making AMD—not Intel—the microprocessor stock to own at the very moment it was declared “game over.”

Which is why I hesitate to declare anything so bold as “game over” for anything but, say, the Red Sox without Manny Ramirez.

Still, once in a while, things get so out of hand—such as last summer’s Time Magazine cover article about “Why We Love Our Homes,” which marked the absolute top in the U.S. Housing Bubble—that the phrase comes to mind and refuses to leave.

And Friday’s Wall Street Journal article about hedge fund managers pitching their funds on New York-to-London flights is about as obvious a sign of a top as I have seen since, well, “Why We Love Our Homes.”

I have tried to figure out how to excerpt the article, with appropriate comments, as I did the housing story last summer, but I find the hedge fund article is so full of fin-de-siecle whoppers that commentary merely detracts from the entire experience.

It begins thusly:

As Eos Airlines Flight 2 lurched amid heavy turbulence on Saturday night, hedge-fund manager Kurt Hovan tried to stay on course, making his pitch to a prospective investor.

The 25-minute sales job by Mr. Hovan, manager of a $21 million health-care fund, fell flat. The investor didn’t bite — he said the fund was too tiny and its investment team too green.

Mr. Hovan was one of a handful of small-fry hedge-fund managers whose hopes took off with the Eos flight. Each paid $3,900 for a round-trip seat on the New York-London trip. The draw: to mingle with captive big-time investors and make sales pitches over champagne and canapes. Investors rode free of charge.

“It’s speed dating for hedge funds,” says Bartt Kellermann of Global Capital Acquisition, which raises money for hedge funds. If investors express interest, Mr. Kellermann arranges follow-up in-flight dinner dates.

For the rest of it, including the hedge fund manager who believes he deserves a 2-and-20 fee structure because of his returns since inception all of 18 months ago, I will only suggest you dig up Friday’s newspaper or, more realistically, check it out online and read it from beginning to end.

As Time Magazine’s everybody-in-the-housing-pool cover story last summer proved, the smart money does not invest in a trend when it is front-page news—especially not when cracks in the foundation, such as the Miami condo market back then, and the Amaranth fiasco today, are visible.

Which is why I’m calling “game over” in hedge fund land. Buyers on the New York-to-London flights, beware…or at least insist on a longer track record than Britney Spears’ latest marriage, which, for the record, will be two years in November.

Jeff Matthews I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.