Disgusted With Hedge Funds? Fight Back

I've invested in hedge funds, I've traded for them, I run a fund of hedge funds, and I've written constantly about them.

But now I'm disgusted with hedge funds. There are two new hedge fund blowups in the news, a continuing litany of the woes inflecting this investment vehicle.

So now, instead of investing in hedge funds, I have a way you can be your own hedge fund by merely piggybacking on the true hedge fund greats.

But first, let's look at hedge funds' latest travails.

About a year ago I wrote about John Devaney's United Capital Asset Management for the Financial Times. United Capital is one of two hedge funds in the media this week after having to suspend redemptions because it's stuck in illiquid asset-backed securities that are crashing in value.

I interviewed Devaney just over a year ago and documented his rise from rags to hundreds of millions of dollars. He started out in college when he bought a video, Buy a House With No Money Down!

"Do those actually work?" I asked him.

"Hell yeah!" he told me, "I ordered the videos on my Citibank credit card that had a $350 limit and bought a house where I cleared $500 a month in cash flow."

Devaney then became a partner in a bar that made him $50,000 a summer for two years. With that capital he opened a brokerage account and began trading options. By the time he left college, he had $150,000 saved and owned a home, a boat, several cars and motorcycles.

His track record only improved. Starting with capital of $500,000 in 2000 he made $5 million in 2000, $20 million in 2001, $35 million in 2002 and $110 million in 2003 trading junk bonds, mortgage-backed securities and asset-backed securities. Here's how he explained it to me:

"Every couple of years there's a crisis that creates opportunity," John told me when I asked him how he did it. "When LTCM [Long Term Capital Management] blew up, everyone dumped the high loan-to-value BB-rated bonds that were all the rage then. Prices went from $95 to $50 even though the underlying collateral wasn't any more or less risky.

"This type of thing happens all the time. When aircraft debt, for instance, got downgraded after 9/11, insurance companies were forced to mass-dump it for regulatory reasons. We were the buyer of last resort. Pooled leases on aircraft that we valued at 80 cents on the dollar we were buying for a lot cheaper just because the insurance companies were required to sell."

Unfortunately, right now he's on the wrong end of the crisis, and I feel bad for him and sorry for the investors.

	Do you think hedge funds can justify their fees? Answer Here