Hedge Funds and Love

by Drinky McDiligence

Hedge Funds have become ubiquitous in today’s pop culture according to the NY Times. They use this snippet from the long running soap opera “All My Children” as proof:

Soft light gently illuminates two former lovers, eyes only for each other, as they stand on a balcony on a warm, starry night.”Love isn’t like a hedge fund, you know?” Ryan tells Kendall. “You can’t have all your money in one investment, and if it looks a little shaky, you can’t just buy into something that looks a little bit safer.”

Obviously, the writers have no idea what a hedge fund is; they probably assume that it’s where all the stock brokers work. What they should say is that love isn’t like a non-diversified traditional long-only fund.

In reality, love is exactly like a hedge fund. Love is a limited partnership structure (LP), it takes a large initial investment, and is largely unregulated. Frequently, it uses an aggressive strategy, relying on large directional bets and substantial amounts of leverage. The plan is to generate significant alpha (using the Lipper Love Average as a benchmark) but it is not uncommon to see a hedge fund or a love relationship with an unsuitably low Sortino ratio, indicating that it has strayed from it’s raison d’etre. This is a hedge fund (marriage) destined for fund outflows (divorce).

Love is relatively illiquid, such that if it takes on large speculative investments, and develops into something like a live-in relationship or marriage, there will be a lock-up period. This is where derivatives and hedging come into play. According to our possibly fabricated research, the married put was developed specifically for use in reducing the downside risk in instititional marriage markets.

It floors your downside, and there is unlimited upside; if the love falters or a better substitute arrives, you can walk away with no marginal pain. The best hedge funds just as the best marriages understand risk management and create an environment where downside protection is a given.

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  1. AngryAnalyst
    December 12th, 2006 | 4:42 pm

    Will this be on the Level II exam?

  2. December 12th, 2006 | 4:48 pm

    Yes. But only for people taking it in Hartford.

  3. Florian
    December 14th, 2006 | 5:56 am

    I reckon the article should have shown also the P/L when for an uncovered short on your marriage (divorce, no prenup).

  4. December 14th, 2006 | 11:54 am

    The Marriage Only dotted line is the pricing for Marriage and Divorce. Love is largely unregulated, but you can’t just short love. You probably need to find some physics PhD to develop a model.

    The closest naked marriage short equivalent is something like a marriage of opportunity such as a Green Card marriage. That’s some other sort of alternative investment, probably along the lines of factoring.

    Or I guess marriage without love is like a strip. But at least you get the face value at the end of the term, even though you’re not getting the coupons.

  5. December 19th, 2006 | 12:27 am

    I’m no financial expert, but I know good, clean humor when I see it! That was a fun read.

  6. Ron
    December 20th, 2006 | 1:02 am

    I thought you might be interested to know that your article made it to my site. I really enjoyed reading it.

  7. December 20th, 2006 | 10:43 am

    Yes, he certainly knows what he is talking about

  8. realist
    December 21st, 2006 | 10:57 am

    isn’t marriage more like bank debt? restrictive covenants with steep penalties for violation

  9. December 21st, 2006 | 5:07 pm

    Realist- It’s just like the movie “The Jerk”. You’re put in front of a firing squad as a penalty.

    No, but seriously, that’s the whole point of the married put. I guess they could have called it a love put, but that’s confusing, because you can love someone but not be in love with someone. So is it the be in love put or just the love put? Married put takes away all of the confusion. The prenup protects you from all of those penalties.

  10. January 3rd, 2007 | 12:59 pm

    COME ON! It says my name right under the title:

    by Drinky McDiligence

    Juggles never even spells out his first name either.

    I understand that the analysts do the work and the MDs get the credit, but the MDs aren’t even mentioned in this research report.

  11. February 5th, 2007 | 11:21 am

    Great analogy about Hedge Funds and Love. My pet peeve is that Hedge Funds by name are misleading. I think what needs to happen in American is that we distinguish between what traditionally would be known as hedging, protecting one’s capital, and an Investment Fund that takes positions in the markets. Maybe some legislation clarify the difference. They have Investment Funds in Ireland, and I think that this is what they should properly be called.

    Evan Andersen
    Lydia Capital