At Issue: Investing with a convert hedger isn’t the best bet

Re: your Aug. 11 editorial [“Letting funds hedge their bets can be a winner for investors”], be careful what you wish for.

There is a long history of failure among managers of mutual funds in their attempts to run hedge funds. Forget Jeff Vinik; exceptions are always only exceptions. Most others who fled Fidelity or Oppenheimer or other mutual fund groups have not been heard from, largely because they couldn’t handle the many hurdles that make hedge fund management much more difficult than following a long-only mandate.

Running a hedge fund, simplistically, requires finding stocks that go up and others that go down, or which hedge the risks of the long bet. However, actually doing this is twice as hard. And then there are the mechanics: arranging a borrow, the use of leverage, counter-party issues, managing exposure, et al. The risks are everywhere, which is why so many hedge funds fold. Last year alone, 1,000 funds closed.

The biggest hurdles are “cultural.” Professionals who train their entire lives to uncover “value” are not necessarily adept at capitalizing on “excess.” And if you short, the freight train called momentum can take a flawed stock and drive it ever higher, a reality we witnessed when hedge funds shorted tech stocks too soon. And I’ve not mentioned derivatives or currencies or other potential booby traps that hedge funds face.

I’ve spent 23 years analyzing hedge funds after having been a pension consultant from 1970 to 1980. The exercise is very different from examining long strategies. Before I would authorize shorting or hedging on a broad scale for mutual funds, I would thoroughly analyze the downside. Having the right to hedge is very different from having the skill to hedge.

RICHARD KLITZBERG

Klitzberg Alternative Investments Inc.

Boca Raton, Fla.

Family office: New shoebox

Your Monday Morning [“Helping prepare for death and taxes,” Aug. 11] showed great insight. Have you thought of taking the idea further?

The shoebox is antiquated. Financial advisers and financial institutions now use the services of our firm to process, review and provide oversight of all mail, bills, household affairs and administrative paperwork, in addition to scanning/indexing and creating a “personal disaster recovery” system for their affluent-client families.

There hasn’t been much said on the administrative-family-office-services industry, but it truly is the first step in holistic and comprehensive wealth management.

NancyAnn Akeson

President

Total Personal Services Administrative Group LLC

Garden City, N.Y.

Avoiding blame adds to woes

Congratulations on your editorial of July 28 [“Investors need to shoulder their share of the blame”]. It’s important for investors to confront their complicity in the three-year stock market crash.

Certainly, there were other contributors, but the lack of attention to risk – as you aptly stated – by individual investors must be considered part of the problem. When individual investors accept this responsibility, they may stop buying the latest schemes and stocks of questionable companies from dubious brokers. Then our markets will be healthier places to transfer risk and develop price discovery.

Unfortunately, it’s human nature to blame someone else. Investors blame others for their mistakes by electing politicians who grandstand for their own interests by promising to go after the bad guys.

While some legislative reform is necessary, by and large, our present statutes, when enforced, are very effective. Overregulation can only make our economy and markets less efficient. More skeptical investors, however, will enhance the efficacy of our markets.

Sam Dreher

President

H.S. Dreher Capital Management LLC

Southern Pines, N.C.