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Geneva Learns the Hard Way


Chasing performance is a waste of time.

The good thing about the financial crisis -- and one of the biggest frauds it revealed, Bernie Madoff -- is that it's taking down some institutions that probably had it coming.

Bloomberg has recently reported that the fund-of-funds complex in Geneva has lost 72% of its assets since the end of 2007. One fund-of-funds manager who has apparently held up relatively well was quoted, "Geneva's wealth managers sadly attracted feeder-fund salesmen like flies to a honey pot, who, it turns out, were themselves entrusting their due diligence to a third party."

As I've written before, and as I argue in my forthcoming book, The Undoing of Cowardice, there's nothing wrong conceptually with a fund that accumulates investor assets and allocates them to hedge funds. Some of them, in fact, do it very well and are worth their added layer of fees, because they ask good questions and anticipate market movements instead of just following them.

The collapse of Geneva's funds of funds, and the city's major Madoff investments, suggest that too much of these funds' time was spent networking and chasing performance.

From my own experiences, I cannot say this is surprising. On a marketing trip to Geneva some years back, I found myself constantly fielding probing questions about individuals with whom I'd worked, but virtually none about my approach to convertible-bond investing or the opportunities and pitfalls I saw in the market. At least one of the Geneva firms I met turned out to have a big Madoff connection.

Let us hope that the future of investment management centers around the basic questions. How do you make money? How do you evaluate investments? When do you decide that you are wrong?

People who allocate their hard-earned money to professionals don't need to know all the answers, but they need to know how to ask the right questions. This goes for teachers and coal miners just as much as for pension-fund managers.

Geneva has learned this the hard way.
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