The Red-and-Black Fund

Since another multi-billion-dollar hedge fund announced on Friday that it had lost almost all its money and was liquidating, I suppose it’s a little too late for me to start my own Red-and-Black Fund, based on some shrewd investment principles I worked out a few years ago. Therefore, I suppose I’m not losing anything by posting the core “investment strategy.”

You collect lots of money and keep it in the bank, earning maybe 3%. Then, once a year, you fly down to Las Vegas and bet it all on one fair roll of the big Roulette Wheel, having covered all but one or two of the numbers. Unless you’re really unlucky during the first couple of years, this should net you a total return of something 6-9% annually (including your bank interest).

Notice that these returns are very, very stable. Basically, you earn 6% or whatever, each and every year.

Since your returns are so extremely stable, you must have a very safe (secret) investment strategy, and everyone is impressed.

But 6% isn’t high enough, even for a very safe strategy. So you go down to the big money-center banks, and “leverage up” your stable strategy, by borrowing five times your invested capital. Suddenly, your returns are just as stable, but have been now “leveraged up” to an annual 30% or whatever!

Even netting out your hedge-fund fees of 2% of equity plus 20% of profits leaves an outstanding return for all your fudn investors, especially since it’s so remarkably stable, year after year. Best yet, your “investment strategy” is one of the very few that can be scaled up in size without limit or degradation in performance.

So many, many, many more investors give you their money as well.

I’ve sometimes wondered whether the recent growth in hedge-funds had some connection to the recent growth in Las Vegas revenues…

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