On the gullibility and incompetence of fund managers...

It has been said (and it's certainly true) that, most fund managers who made money during boom times but couldn't handle any bust, are less than mediocre.

News came out today that a number of fund managers in Europe were hit by the Bernie Madoff ponzi scheme which could cost investors $50 billion or more. These fund managers were not directly investing with Madoff, but were investing in funds from JP Morgan which in turn acted as conduits to channel fresh funds to Madoff. It turns out, JP Morgan's internal risk management and audit folks did their job right and determined that the Madoff funds were too fishy, hence pulling out JP Morgan's own money from Madoff, but leaving its hedge funds' investor money with Madoff. Naturally, those investors were livid now, knowing that their investments would probably become worthless, while JP Morgan came out unscathed.

The funny thing about this is, these supposedly professional fund managers were claiming the exact same argument of gullibility as average joes like the Lehman Brothers mini-bonds in Hong Kong which were pushed by various banks. Those poor folks (like those retired citizens who invested their entire retirement savings in the mini-bonds) said they thought it has principal protection, and the bonds had the backing of the banks, wcih apparently was not the case.

These fund managers were claiming the same thing, that they were under the belief that since the conduit funds were sold by JP Morgan, they thought they couldn't lose any skin. It turns out, of course, that it wasn't the case.

Why then, shall we ask, are we paying fees to these fund managers who do not even have intelligence or are too lazy to do any due diligence of their own? Apparently, JP Morgan claims that the risks were listed in the sale agreement of the funds, but these "professionals" didn't even bother to read closely, which was exactly the same mistake as the Lehman mini-bond holders (who are _not_ professionals).

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This past summer when we were vacationing in Hong Kong, I was struck by the advertisement of the Lehman bonds as well, what with all the seemingly attractive yields and all. I got a prospective, read through it, and decided that all the risks (which were many) were assumed solely by the investors, and the banks (that were selling them) really had nothing to do with backing the bonds. So, I decided not to put any money in it. I should have shared that thought with one of my sisters in Hong Kong, since she was one of the gullible victims who bought the Lehman bonds thereafter.

While I felt kinda bad about it, for if I had shared my thoughts with my sister, she might not have gone ahead with the investment in the Lehman bonds that cost her more than HK$500k; on the other hand, I thought she would have done her basic due diligence, not just in this investment, but everything else in life, considering that she's a financial controller in her company. Apparently, when it comes to investment, alot of us, professionals or otherwise, can sell ourselves short, and delegate/defer the due diligence to someone else who might not do the job.