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European Parade

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I just returned from a week in Europe, spending most of my time in London and Geneva, where I met quite a few large investors in hedge funds. I also gave two speeches to groups of potential investors with other hedge fund managers. I came away with two thoughts.

First, the loss of wealth for Americans is very real. Everything in Europe costs 30% more to us than it did a year ago the last time I was there. We don't really feel that impact here, at least not yet, because of a couple of things. Interest rates are low, for what I have argued are artificial reasons, so the consumer is able to borrow funds cheaply enough to offset things like increases in prices of real estate. Secondly, companies, both foreign and domestic, are not able to pass on increased costs to their customers. Profits are still being driven by their relentless pursuit to continue to cut their costs as well. I continue to believe that Americans will soon start to feel the pinch. Stagflation in my mind is a very real scenario.

Second, the quality of hedge fund managers I met is very poor. Almost all depend on the same old research put out by self serving parties and almost all depend on market direction to make money. A hedge fund is by nature a structurally flawed vehicle: the more leverage managers use, the more money they can make with your money. They view leverage as a way to increase returns on poorly priced securities, not as a way to extract returns from low risk securities. Leverage in of itself is not a bad or good thing; it is its improper use that can be disastrous.

The investors I met in Europe seemed in general more sophisticated in understanding hedge funds and risk. I like that. I plan on going back.

My suggestion, if investing in hedge funds, is to get to know the managers very well, for it really comes down to that. Make sure that they don't make money by just picking market direction: no one can do that consistently. And make sure you diversify.

While I was gone I watched volatility in the market pick up. This first sign could be a precursor to further increases. That is my bet in general.
No positions in stocks mentioned.

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