Betting On Hedge Funds Can Be Lethal To Your Life

Warren Buffett ran a hedge fund. So did Benjamin Graham. Edward Lampert's hedge fund has done well over the years (supposedly.) Although not a big fan of him, so has William Ackman's hedge fund. So this isn't a criticism of the concept of a hedge fund. Nevertheless, it shouldn't surprise anyone to know that there are some bad funds out there. Unlike mutual funds or directly owning stocks, hedge funds are capable of using high leverage and being opaque so the chance of a total blowout are really high.

Well, it looks like a small Japanese life insurer has gone bankrupt because it invested in alternative funds (aka hedge funds). It's one thing for investment funds or individual investors to lose money but it's dangerous to see an insurer go bust.

Yamato Life Insurance Co., a 98- year-old Japanese insurer, filed for court protection from creditors in the nation's first bankruptcy in the industry in seven years, with debts exceeding assets by 11.5 billion yen ($116 million).

...

``We had been doing our risk control accordingly, but the subprime loan problem forced global securities to tank, and that was more than what we'd expected,'' Nakazono, 61, said at a press briefing.

The firm, which had 1,019 employees as of March, had shifted its assets to alternative investments, which accounted for about 30 percent of the total portfolio as of the end of September, to boost returns. The move ended up hurting the company as global markets collapsed, Nakazono said.

I don't care if private investors or investment funds lose money on hedge funds. They are taking risk to make profits and it's their problem if they lose. But I hate to see insurance funds run into problems. Here's hoping that this is just an isolated case and that other insurers, including the giants in Canada and America, have better risk management.