Margin Of Safety Seth Klarman

Klarman Nails Fiduciary Definition, Calls Out Public “For Profit” Hedge Fund Model

In his 2015 year in review, one topic Baupost’s Seth Klarman addressed is perhaps the issue that most impacts society and the financial services industry, particularly if one is to consider the history of the last 20 years. But this same topic was overlooked by much of the media reporting on his letter, including my own.

Also see additional ValueWalk coverage on Baupost's full-year 2015 letter to investors.

Has a fiduciary standard been lost? And if one is an institutional investor, don't they have a responsibility to find those who uphold this standard?

Klarman addressed the importance of being a “fiduciary.” This was at one point a sacred topic that, over the past 20 years, appears to have somehow faded in importance if not being mocked by some of the ruling establishment.

There is both a hard and a soft definition of the word “fiduciary,” and Klarman, who uses Yale University Chief Investment Officer David Swensen as an example one, nails the defining the concept:

While a fiduciary relationship is founded on trust, trust isn’t enough. An effective fiduciary must also be intelligent, wise, and humble. Intelligence is inborn, but wisdom is shaped by experience. Also essential is the self-awareness to avoid behavioral biases, and the adroitness to look around corners and recognize patterns. Fiduciaries must possess the humility to know they could be wrong, and thus to err on the side of prudence and capital preservation. Fiduciaries must have the clarity of mind to identify conflicts of interest, and the character to avoid them as much as possible.

Klarman, for his part, entered the hedge fund industry at a time when being a fiduciary meant questioning authority and looking at investments from all angles. It can be argued that today, based on numerous obviously fraudulent that omitted clear risk issues – Enron, 2008 fraud issues, MF Global bonds and even currently questionable investment offerings – that the concept of being a fiduciary, doing the hard detective work behind an investment and operating in the best interest of clients, appears to be going the way of the eight track tape. Any fiduciary that blindly trusts the ruling establishment is failing in their fiduciary responsibility.

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