Risk Watch: The Continuing Danger of the Young Money Manager

One of the few consolations of the terrible last year in markets is that very soon we won't have to hear some version of the following from older money managers:

These young hedge fund managers, some of them only started shaving yesterday. They've never lived through a bear market like I have so what the hell do they know about investing?

True in a sense, but be careful. First, the veteran can lose money just as easily as the rookie.

Second, and more perniciously, just because a young money manager has been humbled does not mean he now shares your thinking about risk. And in a few years' time, when young hedge fund managers are back raising money for new funds, and they boldly advertise "I've learned my lesson," don't be so quick to believe them.

The game of institutional investment management (especially for family offices) is largely about the Old and the Rich entrusting their capital to the Young and the Poor. But as every older person, no matter how wealthy, knows, the young will always be richer in the one thing that matters most--time. It's perfectly rational for a younger person to take more financial risks because if things don't work out he can always start over.

Charlie Munger, who today preaches jeremiads against debt, was in his youth a highly leveraged real estate developer. Even Warren Buffett borrowed money to invest when he was younger.

Comments

[Moon Kil Woong]

The fund industry rewards risk and discourages prudence. That's simply because there is no risk for them since it's not their money they are playing with. And the more volatility you play with the better chance you get a big bonus. Otherwise you just get paid your base salary. The only major downside is you have to move to another firm where the incentives to gamble are just as strong.

I don't think it has to do with youth or age. It has to do with the compensation system which is most favorable to gamblers and those interested in committing fraud.

2009 Feb 09 02:53 AM

[Tradememe]

Still the young money manager will have learned something out of the last few months. You learn more from a bear market than from a booming one. Also, the more risk you take, the more money you stand to make. And that's the way it is.

2009 Feb 09 03:52 AM

[ROLEX18]

In hedge funds, the younger the worse, I find some elder 50-70y investors being crazy when they give their savings that they both earned in 100 years (50 years each) time to some stinky hot shot.
Invest only with the best, even if young chicken shows you some nice graphs don't trust a word, invest yourself in anything you think is good, you will see how after time you will beat any hedge fund junk to death.

2009 Feb 09 08:49 AM

[Bobhjon]

Tradename: I doubt that they learned a thing, because they know they were right, and the problems were caused by the stupidity of somebody else.

2009 Feb 10 08:57 AM