When Genius Fails, Keep Trying

There’s been some surprise among a number of bloggers that John Merriweather, of ignominious Long-Term Capital Management fame, is starting his third hedge fund using the same strategy that failed so spectacularly in the late 90s it almost brought down the entire banking system. It’s also the same strategy that failed last year in a less grandiose fashion — simply losing 44 percent. Felix Salmon remarks:

You’ve got to give this to Meriwether, though: the guy’s clearly a spectacularly good salesman. That’s a key attribute of hedge fund managers which they tend not to talk about: after all, they love to give the impression that people are giving them billions of dollars just because of their unsurpassed investment prowess. The truth is clearly very different.

This is pretty clearly true, but I’d also add that Merriweather’s salesmanship is at least equaled by much of the elite investor class’ steadfast faith in the power of humans to decode the machinations of complex markets. Obviously, we’ve shown a fair bit of acumen in doing this, but really the only predictable constant is that from time to time, markets behave irrationally. It’s one thing to say it, but it’s another to really understand what this should mean for highly leveraged investing, and frankly, if you really do understand it, I don’t think you’d do it. Participation in these sorts of funds almost necessarily requires you already believe in the soundness of the pursuit. In this case, being a good salesman is really a lot like preaching to the choir. As Matt Yglesias quips, “If [Merriweather] finds investors for a third spin around the wheel I’m going to propose confiscating all the rich peoples’ money and giving it to capuchin monkeys.”

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