When failed genius is rewarded
The reaction to the news that John Meriwether is setting up a third hedge fund has been entirely predictable, especially when Sam Jones’s story deadpans that “the fund is expected use the same strategy as both LTCM and JWM to make money”. (Meriwether’s first two funds, of course, were spectacular failures.)
But really this isn’t a third hedge fund at all, it’s just a reincarnation of the second one, minus the high-water mark. Kid Dynamite explains:
JWM Partners closed last year after losing 44% amidst the market turmoil of 2008. Hedge funds typically have “high water marks” which means that investors don’t pay performance fees to the fund manager in subsequent years unless the fund surpasses its highest point. Thus, the solution for fund managers whenever they have a bad year is to liquidate, wait a bit, and form a new fund?!?! Anyone who was invested in the old fund and the new fund thus pays fees twice: you paid when JWM Partners reached its high water mark, and now you’ll pay again if/when Meriweather Cubed (not the real name) manages to make money – the same money JWM Partners effectively lost after reaching its high water mark.
This is great for John Meriwether, of course. And perhaps, in an attempt to goose his AUM, he might even give investors in JWM a break on his fees. Mostly, however, it’s just an indication of the same delusion that we’re seeing in the leveraged-loan market: the idea that the status quo ante was “normal”, and that now we’ve rebounded back to something very similar. After all, if the financial crisis was a once-in-a-century event, we won’t see another for 99 years, right?
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.