Fool Me Thrice, Shame on Both of Us

We’ve all heard the old idiom “Fool me once, shame on you. Fool me twice, shame on me.” In the words of GW Bush, channeling his inner “The Who” in the form of “Won’t Get Fooled Again:

Can anyone explain to me how John Meriwether is managing to launch a third hedge fund? For the uninformed, Meriwether was one of the principals behind Long Term Capital Management- the hedge fund which put the term “Too Big To Fail” on the map when it imploded in 1998 and necessitated a bailout orchestrated by the Federal Reserve. Somehow, Meriwether managed to start a new fund, JWM Partners, shortly after LTCM’s blowup. JWM Partners closed last year after losing 44% amidst the market turmoil of 2008. Hedge funds typically have “high water marks” which means that investors don’t pay performance fees to the fund manager in subsequent years unless the fund surpasses its highest point. Thus, the solution for fund managers whenever they have a bad year is to liquidate, wait a bit, and form a new fund?!?! Anyone who was invested in the old fund and the new fund thus pays fees twice: you paid when JWM Partners reached its high water mark, and now you’ll pay again if/when Meriweather Cubed (not the real name) manages to make money – the same money JWM Partners effectively lost after reaching its high water mark.

Fool me once, shame on you. Fool me twice, shame on me. Fool me three times? Well, I guess we’ll just go begging to the government for help when that happens…

-KD

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