The WSJ reports that Melvin Capital, the $12.5bn hedge fund at the centre of this GME debacle, lost 53% in Jan.
But that’s ok, they were up 47% last year so net-net, it’s not too bad, right?
No, run the maths.
Start with 100 and earn 47% = 147.
Lose 53% and you’re at 69.
Meaning you’re down 31% on your original 100.
And need a 45% return on your 69 to get back to 100.
And that’s if you had the “good fortune” to be there for the 47%.
But if you chased last year’s performance and joined the party on 31 December, you’ve lost ½ your money in 1 month.
And need a 113% to get back to 100.
Doesn’t say much for how they “control risk” (or how some choose funds).
And drives a dagger through the heart of the argument that
“performance fees align the interests of the manager and investors”.
Having all your own money, invested alongside your clients in the same classes, paying the same fees and exposed to the same risks, aligns your interests, but let’s not pretend performance fees do.
Somewhat strangely, investing cautiously and worrying about the price you paid for assets in the midst of a global pandemic, did not matter last year, you needed to “run with the herd” and own what everyone else owned.
But who cares about calendar years?
Because so far this year it seems to matter.