Our prior blog post, “The Prediction Paradox”, outlined why investing the Wall Street way, by placing bets based on predictions, was a recipe for financial disaster. A recent New York Times article presents the perfect case in point on the dangers of ignoring The Prediction Paradox. Clients of UBS were sold shares of the UBS Willow Fund on the premise that the fund’s experienced portfolio manager and the global reach and research of the firm would position clients for success. Unfortunately for the investors, bets made on capital market forecasts are more likely than not to turn out wrong. When the bets go wrong, investors are left holding the bag.
In this case, the prediction was that the European debt crisis would worsen, causing a decline in the value of sovereign bonds. The bet was made with credit default swaps (a form of insurance). If the prediction proved accurate, the value of the credit default swaps would have increased.
The result: Total return for all of 2012 was -89.21%. On October 15th 2012, the board of directors of the UBS Willow Fund LLC approved the liquidation of the fund.
is the founder and principal of Westchester, New York-based, Fifth Set Investment Advisors LLC, a Fee-Only, SEC registered investment advisory firm. Following a career in equity research, an examination of competing investment management approaches led Ian to create Fifth Set to offer clients customized wealth management strategies built on a foundation of evidence-based financial theory.