“OH YEAH, HE’S A BRIGHT KID, REALLY SHARP…”

7/3/08

Yesterday’s (i.e., 7/2/08’s) Wall Street Journal contained a heart rending front page story about the travails of investors in a hedge fund run by Mr. A.R. Thane Ritchie, 42, of nearby Wheaton, Illinois. Mr. Ritchie is the stepson of the near legendary Joe Ritchie, one of the founders of Chicago Research and Trading (“CRT”), which was bought by then Nation’s Bank, resulting in a supershot of financial adrenaline for the already loaded, and deservedly so, elder Mr. Ritchie. It seems that investors in young Mr. Ritchie’s fund are down, and down big, approximately 50%. Unable, or unwilling, to come up with the spondulicks his investors are demanding, Mr. Ritchie has severely restricted withdrawals from his fund. Some of the investors, including the family of the clearly legendary Wayne Huizenga, have taken Mr. Ritchie to court.

This story evokes several thoughts, but I will dwell on only a few.

First, it is very difficult to sympathize with people who invest in hedge funds run by guys whose most salient qualification is their ancestry. Yes, young Mr. Ritchie had some experience trading, garnered at the elder Mr. Ritchie’s firm, and had established a pretty good record. But there are plenty of people around with a degree of trading acumen at least as good as that of Mr. Ritchie, and people like the Huizengas are not throwing money at them. Perhaps those who invested with Mr. Ritchie should have done a little more research than checking out his lineage.

Second, vanity sells hedge funds as surely as it sells Jaguars. Some hedge funds are doubtless very good, but all are very expensive and, on the whole, there is little if any conclusive evidence that such funds outperform comparable, much cheaper, mutual funds. Have those who invested with Mr. Ritchie and come to regret it ever heard of an index fund? Or, lately, a decently run TIP fund? I suppose the typical hedge fund manager doesn’t want to bear the ignominy of attending a cocktail party in Greenwich, CT or Oak Brook, IL and having to admit that one is invested in a dumb old mutual fund. Much better to say that one is invested in a big time hedge fund run by, say, “a really smart guy, rowed crew at Yale, left Goldman when they didn’t make him a partner” or “Joe Ritchie’s kid…sharp, really sharp.” Oh well. Perhaps there is some solace for such sophisticated investors in the bragging disguised as complaining in which they can engage at the aforementioned cocktail parties. “Yeah, I lost millions investing with this really sharp guy. Must have had a bad year, but no one could have seen it coming. I guess I’ll have to take him to court if I get around to it. But I hear (insert name of well connected neighbor)’s kid has started a hedge fund and I can get in on that one for only a couple mill.”

Third, apparently Mr. Ritchie’s fatal error was his transformation from relatively low risk arbitrage trading to big bets in insurance, private equity, and real estate, areas in which his expertise was, er, limited. The most salient quote in the article from Mr. Ritchie was “I have a tendency to come on strong when I know I’m right.” Hmm…

I’m a little older than Mr. Ritchie and clearly not as smart as he because I haven’t known I’m right in a long, long time. In fact, the last time I’ve known I was right, I was far younger than Mr. Ritchie is today. I occasionally think I’m right, but even that happens far less than it used to. Having said all that, I am quite sure I am right in one of my approaches to investing: I never invest money with people who know they’re right, especially when they “come on strong when (they) know (they’re) right.” But, then again, I am not a well connected multi-millionaire who invests on the basis of hedge fund managers’ last names.