The I Ching and Hedge Funds
Hedge funds, as originally conceived by Mr. Alfred Jones, are one of the better examples of portfolio management based on the YANG/YIN concept. They have some basic characteristics that make it a great way of investing, and my favorite for my clients as long as they are really “Long/Short”.
Hedge funds, like the YANG and YIN, include three basic qualities worthy of a “superior investor”:
a) Harmony. Hedge funds allow the portfolio manager to take the two sides of investing. It allows the manager to do both: buy undervalued stocks (buy the YIN) while at the same time short sell the strong overvalued stocks (sell the YANG). A portfolio manager that is only allowed to go long (buy YIN) could not compensate for the other side of investing – go short (sell YANG). His position is not humble, as it disdains the YANG side of investing to cover for the YIN side of investing.
b) Commitment. Hedge funds require the portfolio manager invest his own money. By so doing, they create a greater sense of responsibility on the part of the manager. This is what the I CHING would expect of a “Superior Man”.
c) Humility. Hedge funds incorporate a multi-manager approach to investing to lower the performance risks. This is a very humble attitude, one the I CHING likes very much.
If you read the Chapter on Hexagram 15 – Modesty, you will find the following:
Hexagram 15 focuses on humility as the key to success. Everything in the Universe is cyclical, including the events that affect the corporation. Empires, countries, institutions, corporations and individuals all go through cycles throughout their lives until they eventually die. The tendency of the Universe is to look for balance or equilibrium. That is, to take away from whoever has much or whoever is at the top of the cycle and to give to whoever has little or whoever is at the bottom of the cycle, especially when whoever is at the bottom of the cycle is humble of heart. Some examples are IBM, Pen Central and Pan Am. These corporations have gone or are going through a cycle or have already completed many cycles and have finally disappeared.
This law of cycles can be seen in the stock prices. When the price of a stock is too high or too YANG (market value is greater than book value), and the market realizes this, it will begin to sell it off. Or, on the other hand, when the price of the stock is too low or too YIN (market value is below book value), and the market realizes this, it will begin to buy.
All tax systems try to follow this law by taking from him who has much and giving to him who has little. Perhaps one of the ways to avoid the inevitability of this law and have our wealth reduced or at least to mitigate its effects is to donate voluntarily part of our earnings, thus giving away before it is taken away.
Richard Wilhelm says: “This hexagram offers a number of parallels to the teachings of the Old and the New Testament, e.g., “And whosoever shall exalt himself shall be abased; and he that shall humble himself shall be exalted” [Matt. 23:1!21; “Every valley shall be exalted, and every mountain and hill shall be made low: and the crooked shall be made straight, and the rough places plain” [Isa. 40 : 41; “God resisteth the proud, but giveth grace unto the humble” [Jas. 4: 6].”
Richard Wilhelm also tells us that out of the 64 Hexagrams, this is the only one in which all lines are favorable, and therefore also favorable to invest. The Tao, he tells us, recognizes that Modesty is one of the greatest virtues in man as well as in a good manager, and recognizes that success will come only to those who practice it. “There are not many hexagrams in the Book of Changes in which all the lines have an exclusively favorable meaning, as in the hexagram of modesty. This shows how great a value Chinese wisdom places on this virtue.”
The wizards of the investment world such as Buffet, Templeton and Soros, are well known for their modesty. They also know the need to hedge to ensure they cover their investments.
