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Hedge Funds Bushwhacked By Volatility

January 22, 2013

Drama. The five public pension plans in New York City with over $120 billion in investments are interviewing as many hedge fund managers as they possibly can. According to the Office of the  Comptroller, New York City would like to diversify their portfolios and select (anoint, actually) up to fifteen managers with different investment styles who might collectively reduce price swings in their stock portfolio and improve their investment returns (Bloomberg, December 18, 2012, New York Pensions to Add Hedge Funds to Reduce Volatility).

The “goal” appears to be quite modest – please give us a reliable 8 to 10 percent net return every year with no more than a 5 to 7 percent volatility a year in our hedge fund (or any fund) portfolio. But that is the “Holy Grail” of investment success and we don’t know or think that there is any hedge fund or fund of funds that could provably and legally guarantee that result.

And it’s also unlikely to happen by chance. The readers of these Posts, however, know that we’re not kidding when we say

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
With No Fees and No Loads on Capital

but that is a quite different technology and a different theory and practice than is offered by any “hedge fund”. Please see, for example, The Price of Risk, August 2012 or The Nash Equilibrium & Its Stock Price, October 2012 and also our earlier posts on Hedge Funds Bushwhacked By Volatility as we have to return again and again to this rather humiliating topic.

We hope, of course, that New York City’s Police and Fire Departments and the New York City Employees’ Retirement System affecting tens of thousands of critically employed and dedicated workers in the city’s administration and infrastructure will get the retirement benefits and other benefits that they hope for but we know that it is almost certain that in the absence of guarantees from their portfolio managers these benefits will eventually be paid only from the deep pockets of the people and tax payers of the City and State of New York with Federal assistance as required.

For example, the five funds collectively lost $41 billion or nearly 30% of their value in one year and plunged to $74 billion from $115 billion in 2008 and for no discernible reason, recovered to $128 billion over the next four years to the end of 2012. The latter is an astounding gain of +74% over four years but it would look a lot better on $115 billion to $200 billion today than $74 billion to $128 billion and an effectively 12% gain over four years (or less than 3% per year) and they have no idea at all how even that might be continued.

The pillars of finance that currently animate the Comptroller’s Office are that they are looking for event-driven funds, commodity trading advisers and global macro and relative value managers. Their plan is to avoid the often touted “long-short funds” (for good reason – please see our November post) and go for “event-driven” hedge fund managers who can predict triggers for stocks and bonds such as corporate restructuring, acquisitions, management changes and share sales AND “commodity trading advisers” who buy and sell commodity linked and other futures AND “macro funds” which bet on global economic trends AND “relative- value” strategies that attempt to profit from price differences between assets. Amazing.


We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to


Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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