Every home should have a hedge fund

John Andrews says investing is like motoring: it’s not the vehicle that’s dangerous but the way it’s driven

Dave wins millions on the lottery, and the first thing he does is sprint down to the nearest Ferrari showroom and jump into the latest model with extra-deep bass woofers and a little fold-down table for his can of Red Bull. His mother spits out her tea with fright. ‘You’ll kill yourself!’, she screams. ‘Why don’t you buy something safer, like a Vauxhall?’ ‘Mam’, he says, ‘if I drive the Ferrari at 200 mph down the wrong side of the M1, blindfold…’ his mother starts to hyperventilate, ‘…you’re right, I’ll kill myself. But if I drive it at 4 mph in the middle of a field, nothing will happen. It’s not the car, it’s how you drive it.’ Mam goes to put the kettle on, and thinks for a while. She comes back. ‘All right,’ she says, ‘I don’t mind about the Ferrari. But you must promise me one thing — you won’t go putting any of your money into one of those hedge fund thingies, will you?’ Dave sighs and says: ‘Mam — what I said about the Ferrari? Hedge funds are just the same.’

Now while Ferraris get nothing but a good press, you can’t say the same about hedge funds. Occasionally a big one hits an iceberg, making a field day for the I-told-you-so brigade. You may well have read recently about a US-based fund called Amaranth, which — although the full story is yet to emerge — appears to have made some catastrophic but actually rather simple mistakes speculating on natural gas prices. Then you’ll see headlines like ‘Hedge fund manager buys Monte Carlo!’ And it’s true, the top managers do make wagonloads of money — just like top footballers, pop stars, disc jockeys and celebrity chefs.