What Tiger Woods Can Teach Us About Hedge Fund Risk

“I like See’s candy. Put me in a See’s store, I’m eating candy. The whole world is Tiger’s See’s store, and the candy is vagina.”
— From the “Shit my Dad Says” Twitter account

We have all known for a long time that Tiger Woods shares many signature characteristics with hedge fund managers.  He is good looking, and he has an exceptionally good looking wife.  He’s really rich.  He excels at a snobby sport.  He has a big yacht.

But one similarity to a typical hedge fund manager that we might not have appreciated until recently is the nature of each’s portfolio risk.

For years, Tiger Woods carried along, nurturing his squeaky-clean public image while cavorting with a portfolio what are reported to be dozens of floozies in secret.  From the outside, this arrangement was a very low-risk one — so low-risk, in fact, that his corporate sponsors were willing to pay him a reported $90 million a year in sponsorship deals because his track record as an investment had such low volatility.  We might say that Tiger Woods’s investment strategy was to pursue monetary return and personal return with this dual lifestyle.

It probably occurred to Tiger that each of these dozens of dalliances introduced an isolated risk to his career and marriage.  If one of them were discovered, it would be a problem, but it probably wouldn’t spell disaster for him.  After all, they were uncorrelated risks, right?  Presumably, none of the floozies knew of one another’s existence, and each had just as much to lose as him if those relationships became public.

All it took was a single, seemingly innocuous event for all of these seemingly uncorrelated risks to suddenly become highly correlated (in the investment world, an adage holds that “the only thing that rises in a market crisis is correlations”).  A single text message, apparently, set of a cascade of revelations that threaten to ruin Tiger’s career, not to mention his marriage.

Hedge fund investors should heed this lesson.  Simple evaluation of a historical return series can’t hope to capture the embedded risks in a portfolio management strategy.  Many risks lurk in a seemingly stable portfolio.  And all it takes is a seemingly remote event to blow up an entire strategy.

Might we surmise that Tiger Woods, in late 2009,  is the last victim of the 2008 credit crisis?  If not literally so, the broad principle applies.

But all is not lost for Tiger.   He may still have a future as a hedge fund manager.  Heck, it worked for John Meriwether.

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