It’s a Bad Idea to Ape Hedge Fund Investments

Dinakar Singh’s TPG-Axon hedge fund has told

its investors that it really does hedge its positions:

TPG-Axon told investors in its latest annual report that 64 percent of its

returns came from alpha as measured against the MSCI World Index, one of the

broadest measures of market performance…

The firm had offset a long-held position in ResMae, a subprime lender, with

shorts on subprime credit instruments because it felt that the risk implied

by the high rates of return in the equity and preferred markets were not reflected

in the low credit default risk set by the credit markets. ResMae filed for

bankruptcy protection in February, but TPG-Axon netted hundreds of millions

of dollars on its shorts. “Things working out badly was almost better

than things working out well,” Singh says.

This is exactly the sort of thing that hedge funds are meant to do: find arbitrage

positions which make money whether the market’s going up or going down. Such

arbitrages are the most valuable things that any hedge fund manager can find,

and no investor will ever make them public.

But of course people still want to know what Singh’s longs are, even

though he won’t reveal his offsetting shorts:

What stocks does Mr. Singh like now?

Earlier this week at the Ira W. Sohn Investment Research Conference, a charity

event, he offered up three stocks as “long” investment suggestions:

American International Group, Taiwan Mobile and Partner Re.

Of course, if these investments turn out as well as ResMae, that will be great

for TPG-Axon and its investors. But it won’t be so great for anybody taking

Singh’s advice.

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