The Valeant saga is probably a long way from a resolution. Anyone that says they know how it will end is either delusional or looking to influence the stock. That being said, there are a few lessons to be gleaned:
Last week, I finally got around to reading The Hedge Fund Mirage. It was published in 2012, so I’m only two years behind, and the book’s main message is just as valid today as it was when it was written. Namely, the average hedge fund is the last place you should even think about putting your money. The very first sentence of the book makes this point quite persuasively:
“If all the money that’s ever been invested in hedge funds had been put in treasury bills instead, the results would have been twice as good.”
Ouch. The book’s author, Simon Lack, goes on to explain this sorry record by proving and reproving an obvious yet little-acknowledged law of money management. I discuss it in my book, as well (available now for pre-order!): asset size is the enemy of return. Hedge funds produce much better investment results when they manage a relatively small amount of money, but those returns shrink toward mediocrity (or worse) as a fund’s assets increase.
Put simply: the more capital you’ve got under management, the poorer your investors are probably going to be.
I am reading Vanguard founder John Bogle’s most recent book, The Clash of Cultures. It shares a common theme with many of his other writings: the investment management industry has increasingly promoted salesmanship over the stewardship of client assets. The evidence of this is everywhere–from the excessive fees for actively managed mutual funds to the excessive turnover of stocks in most funds to the proliferation of funds (including ETF’s) at many fund families.
I wish I could say that the hedge fund industry has done a better job than mutual funds and focused on stewardship over salesmanship, but I can’t. Hedge funds have been just as bad as mutual funds, especially when it comes to the oldest and most destructive temptation in the money management game: overgrowing one’s assets under management (AUM).