Reacting to the news that Amaranth founder Nick Maounis may be starting a new hedge fund after his last venture lost billions, Bloomberg's Matthew Lynn asks "So what exactly does it take to make a man unemployable in the hedge-fund industry?"
There was a time when financial managers who lost everything were expected to defenestrate themselves. Or at least go away for a while. Maounis quick return has Lynn worried that the mechanism on reputational damage has somehow broken down.
Hedge funds have an unbalanced risk/reward ratio. Let's say you raise $1 billion from investors, and you stand to earn 20 percent of any gains you make on that money. The natural temptation is to take big risky bets. If they pay off, you will collect a fortune. If they don't, well it isn't your money going down the tubes.
It is rather like walking into a casino with a stack of someone else's chips. Most of us would go straight to the roulette wheel, pick a number, put the chips down and try to win.
In effect, the investors take most of the risk while the manager takes a lot of the gains.
Only one real safeguard is built into the system: Get it wrong, and your reputation goes out the window. Your investors abandon you. Your job disappears. Before long, you will have to start remembering the phrase ``Would you like fries with that?'' if you ever want to work again.
That, at least, builds in some incentive to think carefully before placing any wagers on the direction of the markets.
Maounis's possible return makes one wonder if that safeguard has worked this time.
But there is another possibility. That is, perhaps investors are just more rational now. Nick Maounis has a long track-record as a successful fund manager and investors may simply be unwilling to give up the gains they expect he can bring in order to punish him for the collapse of Amaranth. We're still not sure Maounis will succeed in getting his new fund off the ground. But assuming he does that seems a more reliable test of whether Maounis belongs back in the markets than whatever notions of justice journalists might have in their head.
Amaranth's Maounis Should Stay Out of the Markets [Bloomberg]