Do Not Swim

Just when you thought it was safe to go back in the water, something like this comes along:

How Does This Hedge-Fund Manager Make So Much Money? (Bloomberg)

The article profiles Joseph A. Meyer Jr., who runs a little known hedge fund out of Atlanta called Arjun LP.  What makes Meyer so special you ask?

“Meyer is so confident in his approach that he offers an extraordinary guarantee: With Arjun, you will never lose money. His price of admission is steep, however. Investors must hand over their cash for a decade. If they exit early, Meyer keeps half the principal.”

Guaranteed returns not enough for you?  There’s other perks too:

“Meyer extends inexpensive short-term loans against their investments. Recknagel says he’s used the money to invest even more with Meyer. He says he also has a Statim corporate American Express card.”

Skeptical yet? There’s more:

“A lot of things about Arjun might seem peculiar. Since 2013, for instance, it has employed no fewer than three different auditing firms. Brian Kemp, Georgia’s secretary of state, says his securities division has discovered “multiple irregularities” involving Arjun and its parent company, Statim Holdings Inc.”

It gets even better. Here’s Meyer explaining attempting to explain the fund’s strategy:

“All it does is look at the last trade and calculate trades that would be equivalent of, ‘What if this security increases 50 percent in value in the next three seconds,”’ Meyer says of his program.

So just to recap:

• Misunderstanding of what it means to have “custody” of client assets? Check
• Insanely long lockup period (10 years!) for a strategy that purports to invest primarily in “safe Treasury bonds”? Check
• Churns through auditors like NFL teams churn through head coaches? Check 

It didn’t take long for the absurdity of this story to make waves in the financial blog community.  James Osborne and Ben Carlson provide their respective takes here:

Sirens Blazing (Bason Asset Management)

Spot the Red Flags (A Wealth of Common Sense)

So why does this all sound so familiar?  Wasn’t there a guy a few years back that “made off” (wink) with a lot of people’s money? Didn’t his shop share a lot of the hallmarks with the story above? What was his name again??

Red flags aside, it’s not mine or anyone else’s place to label this fund a fraud or a Ponzi Scheme based solely on one article. That’s the job of the regulators.

But as the saying goes,  if it looks like a duck, swims like a duck and quacks like a duck…

…then it probably is a duck.

Who knows, maybe we’re all overreacting and this guy will turn out to be the next Jim Simons.  But I’d put a much higher probability of this becoming a future episode of CNBC’s American Greed instead.  It’s unfortunate, but as long as there are investors who believe that black box-y, secret sauce-y investment strategies with “all of the return and none of the risk” exist, there will always be someone on the other side more than happy to take (a lot of) their money for the privilege.

Warren Buffet is famous for saying, “Only when the tide goes out do you discover who’s been swimming naked.”

But when it comes to highly complex investment strategies with illusions of grandeur like this, rather than wait for the tide to go out, it’s best to heed the “Do Not Swim” sign and avoid these shark-infested waters altogether.