Why hedge funds run by idiots can do well. For awhile.

August 5, 2013
Source: Bloomberg Businessweek Source: Bloomberg Businessweek

Rich? Bored? Unable to find a job because of "Obama"? Then tap into your inheritance and start a hedge fund, bro!

That, at least, is the plan of this charmer, whose recruiting e-mail to his frat brothers got forwarded on to Jezebel:

As some of you may already know, I have been interested in the world of finance for some time. After a series of summer internships, however, I have somehow found myself without a full-time job offer for the upcoming year. F***n' Obama's fault for strangling this economy.

Luckily, due to the tough job market, my dad has agreed to let me access my trust fund early (mid 7-figures) to start a relatively small hedge fund, ___ Ventures, after graduation. I'm emailing you guys today to let you know that, for the rest rest of the year, I will be recruiting 2 full-time employees and 1 intern to help me get this off the ground.

With my financial expertise, help from my powerful father and connections, and a skilled team, I have no doubt that this fund will rise quickly to prominence. We'll all get filthy rich and, inevitably, bag hot slampieces. If possible, I'd love to give all 3 of these positions to my brothers.

More information on the kind of classy gentlemen he's looking for here.

The punchline, though, is that this fund might perform great next year. And the year after that. And even the year after that!

There are two things you should know about hedge funds:

1) On average, they don't beat the market, as this graph from Business Week's excellent hedge fund report shows:

2) In any given year, some hedge funds hugely beat the market.

It's that second bit of information that has parted many a sucker from his money. Some hedge fund posts great results for a year or two, investors rush in chasing that sweet, sweet "alpha," and it's only that next year that the fund crashes straight into reality -- and takes the investors' money down with it.

A hedge fund like the one these frat boys are starting is particularly likely to follow that trajectory. After all, the way to get noticed is to deliver returns way in excess of the rest of the market. The way to beat the market, as Neil Irwin explained with his SCAM fund post, is to do something the market isn't doing. The problem is it's hard to think of some brilliant investment maneuver the rest of the market hasn't thought of.

But you know what's not that hard? Thinking up some investment maneuver the rest of the market has already rejected as too dumb and/or risky and/or illegal. Maneuvers like that can work for a year or two -- which is more than long enough to get your dad's friends to invest. But they don't work for very long.

This kid is a misogynist and a moron who couldn't get a real job even with his dad's connections. But that doesn't mean his hedge fund will fail. It might be exactly why it succeeds, at least for awhile.

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