The initial 3 funds I selected were utterly disastrous

I’ve just returned from a high-status vacation, presumably paid for by my professed investment expertise. This year, my resolution is to be more vulnerable. Gwyneth Paltrow, the founder of Goop, recently stated that leaders must be vulnerable. If people are going to compete on vulnerability, I’m going to go after it hard.

Gwyneth Paltrow, the founder of Goop

The Disastrous Funds

One such acquaintance was impressed by my knowledge of other fund managers. This man was a portfolio manager with a large family fortune. He suggested that I choose funds for his family holding company in order to diversify away from his main firm.

This was an entirely uninvited suggestion; I would have preferred to do the investing myself, but there was no Canadian fund structure at the time. So I went along because, naturally, I thought I knew a thing or two about investing. How difficult could it be? Since the late 1990s, I had been following funds, particularly hedge funds. I started trading in 1999. I had previously worked for a hedge fund. Among other things, I was one of the few people who had completed the Canadian Securities Course with HONORS.

After some thought, I called him and confidently told him that small caps were the way to go. Because I had studied history, and small caps appear to outperform. And, of course, the portfolio would be entirely comprised of hedge funds – none of that boring, old-school plain vanilla stuff. Only “in it” hedge fund managers had the tools and knowledge to avoid bear markets.

The initial 3 funds I selected were utterly disastrous

I also looked into track records. Many Canadian hedge funds were compounding at more than 20% over a few years back then. I was ready to make recommendations after extensive research. Northern Rivers Capital Management, Jemekk, and, this one really hurts, Salida Capital were my first three picks. I don’t think I need to tell you much more if you were there at the time.

During the crisis, all three funds experienced significant drawdowns. Two of the companies are no longer in business. Jemekk Long/Short lost 60% in 2008 and still has about $45 million in AUM. Northern Rivers lost 66% in 2008 and announced a two-year suspension of redemptions (we got out before). The flagship of Salida fell 67%.

It had offshore funds with Lehman Brothers assets. Salida was a Canadian money manager who no longer appears to be active in Canada. Its principal, Daniel Guy, appears to be based in Bermuda, where he continues to run a fund called Harrington Global, which could be a continuation of a Salida fund with only a cosmetic name change. That could be because, by launching and winning eight lawsuits, they were able to recover all of the assets held by Lehman.

To be clear, we did not bear the full brunt of these losses because I panicked and got us out of the funds early. We were never held hostage by a frozen fund. My best guess for the loss is between 30 and 40%. I’d go over all the gory details again, but my records are deficient in this case, all too conveniently. And the principal is no longer alive.

I believe that only stupidity can explain my decisions, but I’d like to add one caveat. I was very focused on trading at the time. My formative experience was riding the Nasdaq bubble and crash of 1999-2000. From then on, I assumed that the only real job of an investor was to be on the lookout for market downturns and sell everything at the first sign of trouble. Believe it or not, this strategy worked perfectly for me.

During the 2003-2007 bull market, I believe the first 15% market pullback (in 2007) became the BIG ONE. As a result, a stop loss mentality worked flawlessly. When they were compounding at 20-30%, I couldn’t believe these other professional managers didn’t have a similar contingency plan.

In retrospect, I realize that their viewpoint was probably influenced more by the strong 1990s bull market, when it paid to ignore adversity and stay long and strong. In addition, I now believe that buy and hold is the right strategy – just not for crappy small caps with low-quality businesses.

Worse, I was also after Lawrence Partners, which is run by Ravi Sood. Another blow-up artist whose sales dropped 81% in 2008. The main thing preventing us from investing was a waiting list. I was also waitlisted for K2, a more respectable arbitrage fund, though they most likely experienced a significant drawdown in 2008.

To my credit, I didn’t invest in Sextant Capital, which was run by a certain Otto Spork and invested in icebergs or water rights related to icebergs. Otto was a dentist who became a hedge fund manager before becoming a fraudster. He fled to Iceland, which is unlikely to have an extradition treaty with Canada. I recently read a story about someone who tried but failed to find him there.

Daniel Guy appears to be a market participant who is still active. I read about a court case in which Harrington Global sought information about a position at Concordia International (a sort of Valeant Junior play). According to reports, they lost $150 million due to the actions of a “cabal of short-sellers” between 2016 and 2018.

The infamous short-seller cabal, responsible for so many company failures. Daniel Guy and his former Salida partner Courtenay Wolfe are also involved in FB Sciences, a plant science company. “We’re not talking about snake oil here,” they state right on their homepage. That’s fantastic, because I’ve always believed in the power of redemption.

I accept full responsibility for these monumental errors. There was no cabal of short-sellers, and it’s not Lehman’s or the Fed’s fault. According to Warren Buffett, if you are a novice investor, you should index. I’m not sure he needs to qualify it as being applicable to “know-nothings.” I recall learning in CSC that the three most important parameters in any investment are return, risk, and liquidity, and that there are tradeoffs between them.

I’m hoping the CSC doesn’t read this because I’m afraid they’ll revoke my HONORS standing. In terms of knowledge, I believe a novice could learn the fundamentals of investing, accounting, and so on in 6 months. But, in terms of judgment, it’s a different story. On that front, I believe I was a slow learner. Some people grasp “buy and hold,” Buffett-style investing much more quickly. That’s because they’re dull, handbag-clutching old ladies.

Or cane-wielding old men. (I am committed to gender-neutrality). But I also believe that making these mistakes is a good foundation. Today, I am particularly interested in the selection of managers. It’s the most important thing for me because I’ve lost interest in picking stocks in public markets on my own. That’s why I like the Ron Mock story: who better to put in charge of manager selection than someone who has seen his own hedge fund fail? Ironically, this is the primary experience I used to obtain my portfolio manager’s license.

The wealthy man I was “assisting” was extremely gracious about the situation. We had worked together on a variety of projects both before and after this episode. We never talked about it again after we got the money back. I’ve often reflected on these events, and I’ve always been grateful for his calm demeanor in the face of adversity.

The primary reason is that he was exactly like that. But then I realized that, in focusing on my own mistakes, I had overlooked one critical detail: most of his money was invested in a firm that was heavily exposed to energy and experienced a drawdown of about 80% during the crisis. As I previously stated, his goal was to diversify. Because I panicked early on, I didn’t fare nearly as poorly as his main firm.

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