It's a Bad Idea to Ape Hedge Fund Investments

Dinakar Singh's TPG-Axon hedge fund has told its investors that it really does hedge its positions:

TPG-Axon told investors in its latest annual report that 64 percent of its returns came from alpha as measured against the MSCI World Index, one of the broadest measures of market performance...
The firm had offset a long-held position in ResMae, a subprime lender, with shorts on subprime credit instruments because it felt that the risk implied by the high rates of return in the equity and preferred markets were not reflected in the low credit default risk set by the credit markets. ResMae filed for bankruptcy protection in February, but TPG-Axon netted hundreds of millions of dollars on its shorts. “Things working out badly was almost better than things working out well,” Singh says.

This is exactly the sort of thing that hedge funds are meant to do: find arbitrage positions which make money whether the market's going up or going down. Such arbitrages are the most valuable things that any hedge fund manager can find, and no investor will ever make them public.

But of course people still want to know what Singh's longs are, even though he won't reveal his offsetting shorts:

What stocks does Mr. Singh like now?
Earlier this week at the Ira W. Sohn Investment Research Conference, a charity event, he offered up three stocks as “long” investment suggestions: American International Group, Taiwan Mobile and Partner Re.

Of course, if these investments turn out as well as ResMae, that will be great for TPG-Axon and its investors. But it won't be so great for anybody taking Singh's advice.