A Heinous Reaction

I was chatting today with several of my hedge-fund-manager buddies. One of my mentors -- the same guy who taught me the saying "You should always be so lucky as to lose money on your hedges" -- runs a hedge fund in which he buys distressed bonds and struggling companies and uses arbitrage and other tools to try to make his investors money safely.

As you might expect, one of the first topics of conversation was how his year has gone. He answered, "Heinous."

I said, "Oh no! What's up?"

He went on to explain how he's up single digits on the year. Up on the year, and he's calling that heinous? "What's up with that?" I pressed again.

It's the partners. They're furious. They can't believe that they're not printing money this year. They act as though they're down 20% on the year. Did I mention that my buddy's fund is up on the year?

Doesn't that say a lot about this market? Do we call such investor attitude "greed" or "complacency"?

The fact is that when you're charging hedge-fund-like fees and the markets boom away from you, your investors are going to be upset. But regardless, the fact is also that you certainly don't have partners angry over making money at market bottoms. You know it's been a heck of a bull phase when investors treat gains as if they're losses. And it's not something that makes me all warm and fuzzy into year-end.

You can't invest or even trade off such anecdotes. And such attitudes might very well just be the beginning of a new market bubble, for all we know. But I will tell you that I am not going to get aggressively long in this environment, which isn't exactly what my approach was coming into 2006. I plan to use a lot of long-dated calls to gain exposure into 2007 rather than loading up and getting levered this far into the boom.

I am ready for the holidays. See you tomorrow, though.

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Cody Willard is the manager of CL Willard Capital Management, LLC. He is a regular guest on Fox News, CNBC and other networks, and he writes a monthly column for the Financial Times. He is also an adjunct professor at Seton Hall University and the author of TheCodyReport.net, a monthly stock market newsletter. Willard appreciates your feedback -- click here to send him an email.