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Money managers under the microscope
Nickels and black swans
Some investors may not be fully aware of the risks they face as career-conscious hedge fund managers plump for strategies that build a convincing-looking track record but occasionally backfire badly.
According to a paper by Yale academic Hongjun Yan, hedge fund managers are far more likely to choose so-called ‘nickel’ strategies than ‘black swan’ strategies, even if returns are ultimately lower and they risk the occasional huge loss.
Nickel strategies are — rather like the contrived image of picking up nickels in front of a steamroller — those that yield small returns most of the time with the occasional disaster.
Yan says the carry trade, merger arbitrage and convertible arbitrage fall into this category.
