Dear Van, long time reader, first time poster, I work at Stillwater Capital, I'm hoping I'm not too much off subject --and was thinking about hedge funds and some of these funds blowing up, and thought that I would add my two cents and see if you had anything to add too -- many investors were hurt by Amaranth this month and I was thinking about the ways some of those affected are going to sort through the damage, here are some principles they may want to have in mind:

1. Sophisticated hedge funds apparently have no clue about should have basic concepts like money management, position sizing and ‘risk of ruin‘ knowledge, and should use stops or have a point where they know to exit.

2. Bennett McDowell once said that, “Money management in trading involves specialized techniques combined with your own personal judgment. Failure to adhere to a sound money management program can leave you subject to a deadly “Risk-Of-Ruin” exposure and most probable equity bust.”

3. The smaller the amount you risk for any one trade relative to your capital base the lower the risk of ruin.”

4. And of course it goes without saying that a good hedge fund investor has to pick good funds to invest in. The key, though, to success in this business, is not to choose the best performing managers, but actually to evade the frauds and blowups.

5. With both frauds and blowups, contrary to public opinion (and myth), size does NOT matter: Beacon Hill was $2 Billion, Lipper was $5 Billon, Amaranth was $9 Billion).

Suffice it to say that these should be some of the main points the main question investors should think about as they interview and select hedge funds to entrust their dollars to.

Do you agree with this?

Jack Doueck
Stillwater Asset Backed Strategies
Stillwater Capital