10/01/2010 03:37 pm ET Updated May 25, 2011

The Mulligans of Hedgistan

With the Dow trading over 10,700 again, the crisis of 2008 is growing long of tooth. Investors are growing short of memory. And many hedgies, who shuttered their funds due to performance, are making a comeback.

Here's an example of what the The New York Times had to say in an article entitled, "Hedge Fund Managers Set Up for Next Acts."

After shutting his giant fund following a humbling loss, Mr. Pallotta, the money manager who is an owner of the Boston Celtics, is doing what hedge fund types do in tough times: he is opening a new fund.

Who doesn't love a comeback story?

Few predicted the financial crisis of 2008 and 2009. Many talented money managers missed the warning signs and took a bath. Who can begrudge them for starting over, for doing what they love? And that's managing money. There's just one problem:

Financial mulligans reward hedge funds and don't clean up the mess.

Call it what you want: "mulligan" or "do-over" or "re-boot." A clean slate is enormously profitable in financial services. By starting over, hedge funds are not required to earn their way back to the high-water mark. No matter how much money they lost in the old fund, the new fund earns 20 percent performance fees day one--assuming returns are positive.

Starting over is nothing new. I explore this issue in my new novel, The Gods of Greenwich, a story that begins in December, 2007. Here's a short excerpt:

“Why don’t you reboot?”

“What do you mean, Cy?”

“Start over. John Meriwether blew up at Long-Term Capital.”

“His new shop is managing three billion down the road from here,” Cusack acknowledged.

“Where else can you lose four billion and stick the landing?” whooped Leeser.

Financial mulligans predated 2008. We're seeing a rash of them now, because so many managers lost vast sums of money in recent years. They're washing their hands, moving on and revitalizing their spectacular compensation. The lack of accountability seems wrong.

Is more financial reform the answer?

I don't think so. Hedge funds don't get do-overs without backing. It's up to investors to assess whether their money managers deserve another shot at the track.

What do you think?

Norb Vonnegut