Investors face a conundrum. Funds seem most attractive when their track record is at its best - and about to decline

What is the biggest mistake investors can make? Complacency would be high on most professionals' list of vices. So too would arrogance. Anyone who believes they have rumbled the secrets of the markets is either a fool, a knave, or both. They will be humbled in due course. Yet one of the ironies of the modern fund management business is that to attract custom, you have to claim a degree and consistency of success that you know in practice cannot be achieved on a sustainable basis.

All professional investors are faced with the conundrum that the most money comes in when your recent track record is at its best - which, more often than not, is exactly the moment when your future performance is about to decline. That is why recent performance figures can be so misleading.

As one of the most successful traders and hedge fund operators, George Soros undoubtedly knows these truths better than most. Three years ago, the New York-based speculator achieved notoriety when his flagship Quantum Fund made an estimated pounds 1bn out of betting against sterling on the foreign exchange markets.

Since then, his record has been poor, down 6 per cent this year by the end of June. All this in a year when the stock market in the US has been booming and every Mom & Pop investor has been coining money from stocks and shares, whether or not they know what they are doing.

This year's darlings of the American press are the Beardstown Ladies investment club, a group of one-time investment ingenues from the south- west of Chicago whose pooled investment funds, started for a bit of a laugh, have been beating the professionals hands down. A book about their exploits has been in the New York bestseller lists for weeks.

Nor is Mr Soros's embarrassment unique. One of the most notable features of the last two years has been how many fund managers with a previously impeccable record in the professional investment arena have seemed to lose their touch. Most, like Mr Soros, were badly caught out by the sudden and dramatic reversal in the American bond market last year.

As the biggest securities market in the world, the bond market inflicts proportionately greater losses on those who get it wrong than any other. It too can have violent mood swings.

It is not entirely a surprise that Mr Soros should seem to have lost his touch. Hedge funds, such as the ones he runs, use a lot of borrowing (gearing) to raise their potential returns and typically do a lot of short selling too - betting that prices will fall as well as go up. Inevitably, they are more volatile.

One little-known fact about Mr Soros is that his experiences with speculating on the UK economy have not been all good. In 1981, the worst year in his fund's history (down 23 per cent), he took a disastrously wrong view on British gilts prices. He lost half his investors and nearly went out of business.

Will Mr Soros recover his lost touch? I expect so, but maybe not just yet. According to research quoted last week in Barron's, the Wall Street weekly, being featured on the cover of Time magazine is a normally reliable indicator that your fortunes are going to take a turn for the worse. We shall see.