Does a 1,000% gain make a hedge fund manager a genius or a contrary indicator?

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From the FT:

A Californian hedge fund has made more than 1,000 per cent return this year by betting against US subprime home loans, making it one of the world’s best-performing funds of all time.

Lahde Capital, set up in Santa Monica last year by Andrew Lahde, last week passed the 1,000 per cent mark, after fees, following the latest leg of the credit market turmoil. …

However, Mr Lahde … has now begun to return money to investors, telling them in a letter: “The risk/return characteristics are far less attractive than in the past.”

In his letter, Mr Lahde said he expected the collapse in value of subprime mortgage-linked securities to be repeated for bonds backed by commercial property loans in a deep recession – which he also predicts.

“Our entire banking system is a complete disaster,” he wrote. “In my opinion, nearly every major bank would be insolvent if they marked their assets to market.” He also said he would be putting some of his own profits into gold and other precious metals.

This raises an interesting question. Should you take Lahde’s continued bearishness as a signal to join him in his gloom, or should you figure that a 1,000% gain cries out for mean reversion, and buy bank stocks? I have no idea what the right answer is. But it’s a question that consumers of investment advice should always be asking themselves.

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