Another case study in investor seduction. Dreier swindled some very sophisticated people.
As far as I can tell, the foundation of Dreier's (short-lived) success as a con artist, the reason he got in the door to see all those hedge funds, was his mere reputation as a high-profile attorney representing high-profile clients.
Reputation, and its close cousin pedigree, is the largest early filter money manager selectors use when evaluating fund managers. Simply put: for whom did you work before you started your fund? It's probably a necessary filter, but every tool in the manager selector's toolbox has its weaknesses.
I hope to expand on this in a later post, but in the context of this one I'll note three of the weaknesses of the reputation filter:
The first is obviously that a good pedigree, in the wrong hands, can be wielded as a tool of seduction, of con artistry.
The second is that reputations rise and fall, and the fall is often swift. Warren Buffett famously said that it takes a lifetime to build a reputation and five minutes to ruin it. Somebody has to be sitting at the other end of the table during the five minutes, and you don't want it to be you.
The third is that for all its importance, the reputation filter is a commodity, and so adds little value to the manager selection process. I know where you used to work and how much your old boss loves you, but so does everyone else.