Hedge Funds.. Sick as a Parrot?

The Business Magazine had an article today that proposes that the hedge fund industry bubble is about to burst because the funds are now investing in football clubs.

"There comes a point in the development of many industries – as there does in the lives of many individuals – where fabulous wealth starts to crowd out common sense" the magazine said.

I can understand their logic, I am a Leeds United fan after all. For all you non football followers and those of you who call it 'soccer', Leeds United are a tragic story of financial investments gone bad.

The club spent millions and millions trying to win the premier league and to gain revenue from the European Champions league. They reached the semi finals 6 six years ago and then promptly started an almost straight line down the divisions. Today they are in 'league one' two divisions below the premiership and have survived administration and bankruptcy. Following £90 million of debt.

The club had all sort of financial instruments in play to buy players that would have looked more like a hedge fund hand book than a football club trying to buy players.

When all these financing instruments started to unravel it became a nightmare scenario where players were bought for £10mn sold for £5mn and the club still had the obligations of wages and the debt... for a Leeds supporter it was a nightmare.

Does this mean that hedge funds are complete fools for investing in clubs? Like any business, it depends which club and it depends on how much money you have.

Newcastle, Southampton and other hedgies choices are hardly the glamor clubs and for them to compete with the best of Europe (the Champions league is where the money is) then they will need to spend vast amounts of money. You only have to look at Mr Abramovich who a few years ago bought Chelsea, poured £250mn in and still hasn't won the champions league... If someone with a personal wealth of £15bn and money to burn without the requirement for a return can't do it, I would be a worried investor if my fund started investing in Football clubs.

"Investing in football clubs is usually what rich men do when they’ve made their fortune. It is how they spend their money, not how they make it. If the hedge funds cannot see that, they are running out of the most precious of all commodities – common sense" I have to agree with Business Magazine on this, I love football but buying a club could very much be paralleled with Branson's comments on how to become a millionaire, he said "First become a billionaire and then buy an airline"

Replace 'airline' with 'football club' and you have some very sage advice for hedgies dabbling in this marketplace... a sign that the hedge fund market 'bubble' is about to burst.... cobblers.... just a sign that some managers may be getting a little over confident, but when has been sensible ever been applied to the hedge fund industry?