Break From the Herd

Wall Street has always been a bunch of lemmings who copy whatever system has been working and attempt to further systemize it and then scale it for profit. And just like corporate group-think has all but ruined the music business, it is also a major threat to the markets and our economy. As the monies at stake have scaled to historic proportions, the growth of systemized money management has been exponential.

In particular, there are the fund-of-funds that have systemized the management of hundreds of billions of dollars. These systems lead these fund-of-funds managers to select only those money managers that will put money to work in accordance to the fund-of-funds expectations, and that leaves no room for free-thinking or flexibility, two traits I believe are valuable on Wall Street.

Running institutional money and want to change your approach because your analysis dictates such? Tough. Stick with the system that got you the money or the fund-of-funds will pull that money, regardless of your performance.

I've had systemic money in my fund before, and I kicked it out after they hounded me for being overly flexible. I'm serious. These system managers have no time and place for free-thinking and flexibility. In my approach to the market (and in my approach to life), I strive to be independent and free willed, and I have sacrificed size for flexibility.

Of course, the record-breaking decline in volatility over the past few years abetted the growth of many of these systems, and that cycle fed itself, delivering steady returns that appear to be "safe."

So what does Wall Street, in its endless greed and systemization of everything go and do? Rather than adjust, these managers try to juice those returns by levering up. And not just at the money manager level, but at the fund-of-funds level. So levered up money gets levered up, and the "safe systems" feed on themselves, further juicing those returns and "proving" the value of those systems.

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Cody Willard is the manager of a hedge fund, author of The Telecom Connection, a newsletter published by TheStreet.com and a contributor to the Financial Times and VON Magazine. He is also a regular guest on CNBC's Kudlow & Company and an adjunct professor at Seton Hall.

He earned a bachelor's degree in economics at the University of New Mexico. Willard appreciates your feedback -- click here to send him an email.