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8:30 AM EST, Thursday, August 2, 2007: Hedge funds were originally set up because they could hedge their bets. This meant they could sell shares short or buy put options, hence hedging against the time when the market went south -- as it has done recently. Hedge funds contrast with mutual funds, most of whom are prohibited from selling short or buying put options.

Someone early on figured that this hedging was worth paying bigtime for. And hedge funds started charging bigtime -- today they typically charge 2% of assets under management (called AUM) and 20% of all the profits made. The more money you have under management as a hedge fund manager and the better you do, the richer you can become. This has encouraged hedge fund managers to take risks, some very very large. This outrageous risk-taking by some hedge funds has fundamentally changed the nature of the hedge fund industry. Now, there are no "typical" hedge funds. And investors who give their money to hedge funds (like me) have to ask serious questions before parting with their hard-earned money. Questions like:

1. Do you borrow money? I personally don't think you should invest in a hedge fund that borrows money. Borrowing increases the risks too much.

2. What do you invest in? Selling currencies short or buying calls on natural gas is a very different hedge fund than one which buys Fortune 500 companies' shares on the New York Stock Exchange.

3. What percentage do you have long? What percentage do you have short? What percentage in cash?

4. What's your philosophy on diversification -- the only "free lunch" in the investment business? Will you put 90% of the fund's monies into a single "bet" -- like the American dollar falling? Or natural gas rising?

The last few volatile weeks have been "The Great Test" for hedge funds.

Some big name funds with big name backers have lost oodles and closed their doors. Most hedge funds seem to have lost between 5% and 10% of their fund in July. But not all. My favorite fund, Modern Capital Fund, was up 5.6% (net of fees), while the S&P 500 index was down 3.1% and the Russell 2000 index was down 6.8%. I asked manager, Dennis Mykytyn, how he did it. His modest answer: "My longs went up and my shorts were down. Isn't that what I'm supposed to do?"

I asked for a breakdown. Dennis said he was 60% long, 20% short, and 40% cash.

More volatility. Or as they say in Australia, "up and down faster than a whore's drawers." Look at this. Late yesterday afternoon, something happened and it bounced up 150 points. How you predict this? You clearly don't.



This morning, the Wall Street Journal wrote:

"The surge at the end of the session sparked speculation about the cause. Hypotheses ranged from technical support, to buying on the lack of "sell" orders, to pension-fund rebalancing, to erroneous trade orders.

"I've never seen anything like it," said Stephen Sachs, director of trading at Rydex Investments. "It's truly amazing" the magnitude and suddenness of such a rally off the lows of the day, right up to the highs.

How long before this blows over?I asked my favorite ex-investment banker, Dan Good:

Harry: How long? I’m guessing that this sub-prime contagion will not spread widely. As the world’s savviest investment banker, you’ve seen this happen before?

Dan: End of the year before it works its way through the system. The most lasting effect will be on hedge funds and their ability to maintain their client bases and to raise new money. Investors will start to quietly remove funds as they reassess the risk and volatility.

Tell your daughter to be more aggressive
About 10 years ago, a group of graduate students lodged a complaint with Linda C. Babcock, a professor of economics at Carnegie Mellon University: All their male counterparts in the university's PhD program were teaching courses on their own, whereas the women were working only as teaching assistants.

When Babcock took the complaint to her boss, she learned there was a very simple explanation: "The dean said each of the guys had come to him and said, 'I want to teach a course,' and none of the women had done that," she said. "The female students had expected someone to send around an e-mail saying, 'Who wants to teach?'

These differences may partially explain the persistent gender gap in salaries. In one early study the volunteers were told they would be paid anywhere from $3 to $10 for their time. After playing the game, each student was given $3 and asked if the sum was okay? Eight times more men than women asked for more money.

Tomato soup: could help boost fertility. From the last Saturday's U.K Telegraph newspaper:.


The lycopene in tomato soup can help boost fertility

A bowl of tomato soup every day can help boost fertility among men, scientists claimed yesterday. They have discovered that lycopene, which gives tomatoes their bright red colouring, can turn sperm into super-sperm.

Researchers at the University of Portsmouth studied the effect of lycopene in the diet on a random group of six healthy men, with an average age of 42. The men were asked to consume a 400g tin of Heinz cream of tomato soup every day for two weeks.

The researchers, from the university's biomedical science department, said that during the two weeks, levels of lycopene in the men's semen rose between seven and 12 per cent, which was "significant".

They added that further studies should be carried out to discover whether the same boost would be seen in infertile men.

Robert Mugabe, thug. Hundreds of thousands are dying in Zimbabwe because of this president/dictator/nutcase.

A friend, Todd Kingsley, visited Zimbabwe recently on his way to safari in Botswana. His Zimbabwean driver would not talk when anyone else was around. In private, he told Todd. "If anyone is overheard talking politics, they disappear."

How crazy is Mugabe? Plenty. He has his own blog, his own "official home page." For an exercise in pure insanity you MUST read it. Here's a sample:

Michael in India. He went there this summer leading a group of American kids to help the locals. They taught English, repaired a school and built a basketball court, amongst other good things. For his India blog, click here. The organization he went with was Putney Student Travel.

This is Michael learning a useful skill -- finally!
He says "If the bowl is empty, I can walk pretty far -- maybe 100 meters. If the bowl is full, I can make about two feet." Michael is 6' 4". His beard is new.

Networks used to cost thousands: Now they cost next to nothing. This ad comes from TigerDirect.com

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Today's Insight:
I spent a fortune on deodorants before I realized that people didn't like me anyway. -– Larry the Cable Guy

And you thought Germany were great exporters. The story: When in Europe recently, I found a tasty power bar. On my return to New York, I wanted to buy some more. I couldn't find them on the Internet. So I emailed the company. Three days later, some moron replied:

Dear Mr. Newton,

we are pleased to hear that you are interested in our SCHNEEKOPPE Fruchtschnitte. However, we have to inform you, that our products are not distributed in the USA. We have given up exports to non-European countries to concentrate our activities on Europe.

Unfortunately we do not deliver directly to end-consumer neither national, nor international, nor do we sell via Internet.

We very much regret not to be in the position to offer our products and hope on your understanding.

Best regards,

Your SCHNEEKOPPE Team
SCHNEEKOPPE GmbH & Co. KG . Postfach 11 53 . 21206 Seevetal . Deutschland

If you're an importer, please import these excellent power bars and sell me some for my tennis bag.

The pregnant 59-year old woman
A woman went to a clinic, where she was seen by a young, new doctor. After about three minutes in the examination room, the doctor told her she was pregnant.

She burst out, screaming as she ran down the hall.

An older doctor stopped her and asked what the problem was, and she told him what happened.

After listening, he had her sit down and relax in another room.

The doctor marched down the hallway to the back where the first doctor was and demanded, "What's the matter with you? Mrs. Terry is 59 years old, has four grown children and seven grandchildren, and you told her she was pregnant?"

The young doctor continued to write on his clipboard, and without looking up, asked, "Does she still have the hiccups?"

How Rubber Gloves Are Made
A dentist noticed that his next patient, a little old lady, was extremely nervous. So he decided to tell her a little joke as he put on his gloves.

"Do you know how they make these gloves?" he asked.

"No, I don't," she replied.

"Well," he spoofed, "there's a building in Mexico with a big tank of latex and workers of all hand sizes walk up to the tank, dip in their hands, let them dry, then peel off the gloves and throw them into boxes of the right size."

She didn't crack a smile.

"Oh, well. I tried," he thought.

But five minutes later, during a delicate portion of the procedure, she burst out laughing.........

"What's so funny?" he asked.

"I was just thinking how condoms are made!"

Gotta watch those little old ladies! Their minds are always working.

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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