# A Billion Here, a Billion There

Fun with hedge funds: "JWM Partners LLC, the investment firm run by ex-Long-Term Capital Management LP chief John Meriwether, lost 24 percent in its $1 billion fixed-income hedge fund this year through March 14, according to two people with knowledge of the matter."

This reminds me of a parable I'm stealing from someone else but I don't recall who that is. Imagine I find a kind of gambling machine somewhere that works kinda sorta like an enormous roulette wheel. It has 100,000 possible outcomes, and on 99,999 of those outcomes it pays off at a 1:1 ratio. But on the 100,000th outcome, you lose at a 1:300,000 ratio. Obviously, placing a bet on that machine would be foolish. But suppose instead I set myself up as a financial assets manager. People invest money with me, I "invest" it for them by betting on the machine, and then I take 15 percent as my management fee. Well, the odds are that for a while I'll be earning a good return for my investors. I'll get a reputation as a genius. The volume of assets under my control will skyrocket, and with it my management fees. And then one day we hit the whammy and everyone loses everything. Except me -- I've already pocketed all the management fees I need.

I mean, if I did that once, nobody would be crazy enough to help me start up a *second* hedge fund, right? **UPDATE:** I should say that, naturally, to make this work in practice you'd have to come up with something a bit more complicated so that your clients don't understand the risks involved. You need to convince them that there are all these really impressive mathematical models that they don't quite understand but don't really want to admit they don't understand lying underneath the whole thing.