One of the most interesting tales of this years’ BRW Rich List was the rise and very rapid fall of 31-year-old fund manager Jeremy Reid. Only last year, Reid was touted as a wunderkind for building up Everest Babcock & Brown (EBB) fund management business and collecting a $200 million stake in the process. Sadly for Reid, his tenure didn’t last that long, with the EBB share price collapsing and Reid being quickly bundled out of the list.

This column had always been suspicious of EBB, which while often dubbed a “hedge fund” is really more of a fund manager which invests clients’ funds in absolute return (hedge) funds. Being a “fund-of-funds” doesn’t seem that difficult — the skill seems to be in raising the capital, rather than running the business.

The Australian reported last year that:

[Reid claimed] the challenge … is not so much finding good alternative investment managers but getting the best ones to accept new funds to invest.

The big fund managers he deals with include Perry Partners, Och-Ziff Capital Management, Fortress group, Eton Park, Atticus Capital and Atlantic Investment Managers.

Reid says that of 10,000 funds around the world, only 300 fit Everest’s own investment criteria.

Just to clarify – according to Reid, the tough part is getting hedge funds to accept Everest’s clients’ money. This claim appears a little strange given that the funds in which EBB would invest receive management fees based on how much they invest. The more assets the hedge fund has under management, the more they charge in management fees (usually, hedge funds charge a 2% management fee plus 20% of out-performance). Crikey doesn’t know of too many businesses which prefer making less money than more money. Although Reid may have just been vindicating his wealth – fund-of-fund management ain’t Warren Buffett stuff. EBB doesn’t do the investing, rather, it clips the ticket and gets others to do the work.

The concept works fine when hedge funds are providing strong returns and lazy fund managers here can make easy money, but when the investee hedge funds returns weaken and Everest clients pull their money, suddenly the music stops.

Babcock & Brown Infrastructure (BBI) certainly hasn’t helped its cause by making dome dud direct investment as well. As the Mayne Report noted, BBI’s stake in Babcock’s Melbourne Children’s hospital PPP appears to be a loss-making investment. (The broader relationship between EBB and Babcock also appears suspicious – with BBI giving Babcock $26 million to use the Babcock name. Given that Babcock’s owns around 30% of Everest, you’d think they’d be able to use the name without having to pay Babcock for the privilege.)

Despite his unceremonious removal from the Rich List, Reid certainly isn’t lining up at Centrelink. The fund manager is still be worth at least $25 million (based on his equity stake in BBI, while Reid’s 6 million options are currently out-of-the-money). But Reid’s rapid rise and fall almost followed an all too familiar script. Reid studied construction management at university and almost straight after started managing $5 million of his family’s capital. Reid’s father is a lawyer, specializing in construction, while family money comes from a (since sold) pesticide business.

As the Reid experience shows, Australia’s record of wunderkinds isn’t quite that of the US, where Bill Gates, Steve Jobs, the Google Guys, and Larry Ellison all got rich very young and continued to multiply their wealth as their businesses matured.

By contrast, Reid’s tumble emulates his Sydney Eastern suburbs neighbor, Jodee Rich, who leapt onto the rich list with his Imagineering computer business in the mid-1980s. Imagineering failed and Rich was bundled from the list (only to briefly return during the One.Tel boom when James Packer and Lachlan Murdoch didn’t believe that history would repeat). Similarly, Sausage Software’s Steve Outtrim (who famously posed on the front cover of The Age atop his Ferrari) also fell from grace after the dot.com bubble burst. Eddie Groves, another who made his fortune at a relatively young age lost almost everything this year as ABC Learning Centres hit the wall and Eddie’s margin lender sold all his shares. Another of Australia’s young rich, “Crazy” John Ilhan sadly passed away earlier in the year from a heart attack.