LTCM was a special bunch though, especially because of the astounding amount of leverage at play.

There are certainly more modern examples like Pershing Square which bet big on Valeant, Chipotle and (short) Herbal-Life.

If you notice, the common trend seems to be lack of risk mitigation.

The lack of risk mitigation is perfectly rational because of the lack downside. If a manager creates a hedge fund that has a 10% chance of making $1 billion and a 90% chance of losing $50 billion, he's got a 10% chance of making $200 million and a 90% chance of making $0. That means his expected return is $20 million for a fund whose expected return is -$44 billion.

I'd like to understand what you mean by those numbers. Why does the manager's numbers for gain/loss differ from the fund's?

Because the fund manager's downside is capped at 0. Bankruptcy heals many ills.

Also because of the survivor effect: if 3 hedge funds do poorly and one does incredibly well, guess which fund manager gets interviewed on the news. And don't be surprised if the analysts decide that half of the funds were incredibly successful (since 2 of the 4 were really in a different category and shouldn't​ count).

I'd put downside capped at 0 and bankruptcy in different groups. At the very least you lost time. You probably also had some investment in the business. Downside capped at 0 would be some opportunistic investment using spare cash with a gain or 100% return guarantee.

But, you get the carry of some percentage which should pay for your time.

2 and 20. His scenario is a little contrived though

also, LTCM managers were partners in the firm.

You're kidding me, right?

What do you think "hedge" fund means?

Good luck on the next job if you lose a firm $44B

To be fair,I would pretty pissed off if I invested with Bill Ackman and he followed standard risk mitigation and diversification strategies.

The idea is to get concentrated exposure to stuff that's not just equivalent to being long the whole market.

That's why nobody invests all if their money with Pershing Square. It's just not what the fund is designed to do.

The idea of "hedge" fund is also to hedge their bets and preserve capital in-case of downside. Ackman doubled down on his biggest losing bet (Valeant), actually more than quadrupled down by taking up exposure to options that were almost worthless when he unwound the position.

The "hedge" part of "hedge fund" is a misnomer. The defining feature is that they're lightly regulated.

Historically, "hedge fund" was named after a private fund that did pairs trade by shorting one security as they long other to hedge their losses in a downturn or broader market decline.

Modern hedge funds use futures, swaps and derivatives to the same effect, hedge in "hedge fund" is in no way a misnomer and being lightly regulated is a direct consequence of them being limited partnerships which are not open to public or non accredited investors and not the other way round.

The economic models of risk that most hedge funds use are...odd.