Christopher Fildes

It’s the Schwed Test: was your money stolenor did you just lose it?

It’s the Schwed Test: was your money stolen or did you just lose it?

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The hurricane season has opened early in Florida, where a hedge fund has blown away, leaving some seriously rich investors seriously poorer. The $250 million question, so their attorney says, is whether the money was lost, stolen or strayed. The two Koreans who managed the fund seem to have left town, so it is no use asking them, but the money is unlikely to blow back again, and the attorney’s question was first raised by Fred Schwed in his Wall Street classic, Where Are the Customers’ Yachts? He put it this way: ‘Was it stolen or did you just lose it?’ The result might be the same, but investors have strong feelings: ‘The burnt customer certainly prefers to believe that he has been robbed than that he has been a fool on the advice of fools.’ Then he can have the satisfaction of shouting ‘Stop thief’ and calling for new laws and tighter regulations. I count on the hedge funds to put more investors to the Schwed Test. Stick a pin in the list — it goes on for several pages — and entrust your money to a manager who offers superior returns from unconventional investments. The returns from conventional investments have been so dreary for so long that this proposition is tempting. It comes, of course, at a price. You will pay a fat flat annual fee and let the manager keep a proportion of your winnings. The losses, if any, you keep for yourself. You are asked to believe that these superior returns derive from superior techniques deployed by superior beings, but they must bear some relation to risk. Do not, for instance, expect to take your money out in a hurry.

Through a hedge, backwards

Some funds have done well by the simple technique of borrowing short and lending long, but even that, by definition, is risky. Some put their faith in a formula, like the Nobel prizewinners who went down with Long Term Capital Management by failing to distinguish the improbable from the impossible. Some look for quick turns. Few are transparent, for that, after all, might give the game away. Quite what risks they may be running, some of their holders will find out the hard way, and whatever the answer may be to the $250 million question in Florida, the Schwed Test will prove a true guide. Schwed himself supplied the answer: ‘Nothing crooked — just bad luck and bad brains met together in an effort to do something that couldn’t be done in the first place.’

A game of two halves

London Stock Exchange 1 (Seifert (o.g.)), Deutsche Börse 0 (after extra time). Now there’s a turn-up for the book. The home side still has to meet Euronext, but if Jean-Fran