240 hedge funds were liquidated in the first quarter of 2010

[Black Swan]

Morning guys, so if you're profitable so far this year give yourself a shiny...Hedge Funds? I 5hit 'em...

Hedge funds hit in 'monstrous' May

Global hedge funds in May suffered the heaviest losses for 18 months after some of biggest and most successful managers were wrong-footed by world markets...

Fund of Funds, which pool large amounts of money and feed capital into hedge funds, were the worst hit. More than 102 fund of funds closed in the first three months of the year, marking the seventh straight quarter in which winding ups exceeded new launches.

The poor performance even among the star players has compounded investor fears over the high-rolling sector. Data from HFR published yesterday found that 240 hedge funds were liquidated in the first quarter of 2010 - a number that risen for the first time in over a year.

The research found that the sector, which suffered £460bn of redemptions during the crisis, rebounded during 2009 with assets under management rising 21pc to £1,800bn globally.

However, many managers are not optimistic about the immediate future, especially for London-based funds where the EU's controversial directive designed to regulate hedge funds is adding to uncertainty. One said: "The in-flows are drying up. In Europe, hedge fund investing has become almost immoral in the light of the directive. American investors are still keen on hedge funds but the opportunities are so great over there that they don't need the hassle of investing over here
http://www.telegraph.co.uk/finance/...7812107/Hedge-funds-hit-in-monstrous-May.html

 

[BSD]

Forbes had an excellent piece about hedge funds back in 2001, and fundamentally nothing much has changed since:

The $500 Billion Hedge Fund Folly

(A mere 500 Bill was the size of the industry back then)

Some excerpts:

"The $500 Billion Hedge Fund Folly

James M. Clash, Robert Lenzner and Michael Maiello with Josephine Lee, 08.06.01

What's so alluring about unregulated investment partnerships? They soak you with high fees and underperform the market.

What do Barbra Streisand, Senator Robert Torricelli and Bianca Jagger have in common? They have all lost money investing in hedge funds.

You don't have a hedge fund to brag about at lawn parties? That could be because you're too timid to swing for the fences, as these private investment partnerships often do with leverage and exotic derivatives. It could be because you are not well connected. Hedge funds, after all, cannot advertise, so you have to know someone to get in one. Maybe you are not rich enough. These funds for the elite are allowed to take only "sophisticated" investors, defined as people with a $200,000 annual income or a $1 million investable net worth.

Or maybe you are not in a hedge fund because you know better.

...The usual hedge fund contract at least protects you from getting whipsawed by a manager who makes money one year, loses it the next and makes it back the third year. The "high-water mark" provision works this way: If the manager gets an incentive fee for taking the fund up X%, he doesn't get additional incentive fees until the fund tops a cumulative X% return. Say the manager doubles a $10 million pot to $20 million, pocketing a $2 million incentive. The next year the $18 million pot shrinks to $10 million. Additional incentive fees are due only to the extent the manager pushes the fund above $20 million.

Sadly for investors, the high-water mark carry has created a flight syndrome among hedge operators. If they have a really bad year they just fold up shop. After suffering heavy losses in 1999 Julian Robertson simply closed up what was left of his $22 billion (peak) Tiger Management hedge fund. It would take years for him to climb out of the hole. Of course if he ever wanted to start fresh with a new management company, there would be no high-water mark.

If you want to know what's wrong with the hedge fund concept, spend some time with John Bogle, founder of the Vanguard Group. He has spent his 50-year career agitating for lower investment costs and so is naturally hostile to things like one-sided incentive fees. But he makes a compelling argument. When you are contemplating the returns you can get from investing this way, he says, don't think about the 456% that this or that manager made in a good year, think about the collective returns from the whole style.

"I think it's inconceivable that you could take $500 billion run by 6,000 different managers and expect these managers to be smarter than the rest of the world," says Bogle. If the overall market is up 10%, he calculates, then hedge fund operators would need a 17% return to beat that--given a 20% carry, a 2% annual fee and taxes. "I don't think that $500 billion has a remote chance of beating 17%," he says.

((Let alone the hundreds of Billions being run today))

...Here's the beauty of hedge funds for operators, if not investors: Anybody can open one. "Every Tom, Dick and Harry is putting out a shingle," laments Elizabeth Hilpman, a partner in Barlow Partners, a seven-year-old New York hedge fund of funds. "It's become harder to tell the good managers from the bad."

No kidding. Paul Mozer, whose fast-and-loose bond trading landed him a prison term and almost tanked Salomon Brothers, is said to have started a hedge fund. And John Meriwether, a figure of widespread ignominy after Long-Term Capital imploded, has simply launched a new hedge fund, JWM Partners.

Look at some of the charlatans who have invaded the field. The secretive nature of hedge funds makes them enticing vehicles for con artists (see p. 72). For instance, after the SEC suspended him in 1993 ex-Goldman Sachs mortgage trader Michael Smirlock raised $700 million to start three hedge funds. Last December he again fell afoul of the SEC, which sued him for hiding $70 million in losses from his investors.

The obituary list of hedge funds should give pause to anyone imagining that all these contraptions are bound for glory. Bad bets blew a hole in Streisand's fund, BKP Partners, in mid-1998. She was party to a class suit against manager Robert K. Pryt and his onetime $270 million fund, finally striking a settlement for 1% to 2% of investors' initial outlays. Torricelli, the ever-controversial New Jersey Democrat, and his ex-girlfriend Bianca Jagger (Mick's ex-wife) were in the $13 million Porpoise Fund when it went south, also in 1998. Rick Yune, the hot young movie actor (The Fast and the Furious), used to be a Wall Street trader; still, he lost money in three hedge funds and now is out of them entirely.

The unhappy truth is most hedge funds can't deliver on their promise of beating the broader stock market over the long haul. During the last five years (through May 2001), the S&P 500 returned an annual 15%. But 9 of the 10 weight-averaged classes of hedge funds monitored by CSFB Tremont delivered sub-S&P returns, after fees. Over ten years hedge funds look even worse. According to MarHedge, another hedge fund tracker, of its 14 major hedge fund categories only 1, called Global Established Markets, beat the S&P's 18% return from 1990 through the middle of last year, and it did so by a rounding margin.

Even worse news: These system-wide figures are too kind to hedge funds. Their managers have no obligation to report returns to the SEC. This business has no Morningstar or Lipper; hedge fund trackers cover just a portion of the business. If hedge fund operators don't feel like answering a survey during a bad quarter, they don't. In 2000's first quarter 1,068 hedge funds reported to MarHedge, by year-end 160 of them, or 15%, were missing in action. Commodities speculator Victor Niederhoffer reported assets of $125 million to MarHedge in July 1997. In October of that year his position on the Thai baht wiped out his fund. Rather than record a 100% drop in the fund's assets, Niederhoffer simply disappeared from MarHedge's list.

Auditors are no help, either. Unlike those examining corporations and mutual funds, where they work for investors, hedge fund auditors are in the employ of the managers. Whatever independence accounting firms can muster in their corporate work, it stands to reason they have still less with the hedgies. Ernst & Young and Deloitte & Touche both did audit work for scamster Berger. It wasn't their fault, they said; Berger deceived them.

Still, you're thinking, aren't there geniuses out there who could make money for me? Didn't Warren Buffett have a hedge fund back in the 1960s, before he bought control of Berkshire Hathaway? I just have to find the next Warren Buffett.

Good luck. You and several hundred thousand other investors are looking for a few geniuses camouflaged in a crowd of racetrack touts. "

 

[meanreversion]

Huh, May was an outstanding month for me, I would have thought it was a good trading month in general.

I've recently finished reading an excellent book "86 biggest lies on Wall St".. one of the assertions is that hedge fund overperformance (if indeed it exists) is due to better information. Banks make money off HF, so they feed them timely information.

The point about the high watermark is salient - look at that other "guru" John Meriwether who has now blown TWO funds. I'm sure he'll open a new one in a year or two.

 

[gooseman]

RV funds hada tough month

 

[shadowninja]

Makes you wonder if some of them simply bought and hold shares and rode on the wave of the larger market movement.

 

[Black Swan]

You know the way we all reference film quotes to *stuff* in our lives? I often think of that quote in Philadelphia when Denzil Washington says; "Explain it to me like I'm a five year old..." Well best explanation I could give to my youngest (when he was 6) about the markets and what *Dad does* was this...

"OK so you know that game we've got Hungry Hippos? So the banks and govts around the world create loads of balls (money). Then the big banks play a massive game of Hungy Hippos to see who can gobble it all up first, then they put it into various piggy banks or savings accounts after taking half the balls (money) for themselves. They give this game different names to make it sound hard but really it is just one giant game of Hungry Hippos. Now here's the fun, once they run out of balls they cry and sulk like little babies, so the governments and the banks simply create more, maybe not as much as the first time, they want to pretend to be telling them off for being too greedy the first time, and they get to play again...

 

[meanreversion]

My 3 year old would reply to that by saying "why?"

 

[anley]

Hedge fund liqudation (the closing of the fund) is usually a strategic business move, and a cynical one at that.

Basically the fund managers see how much they've lost (assume 30%). They now have to make back the 30% just to get paid (they do continue to receive a paulty 2% managment fee).

So they close the fund down and then lobby the present investors hard to reinvest in a newly developed fund. This will come with a spanking new name with new super strategies to trade with.

The advantage now is that any profits generated from the new fund will mean a 20% incentive fee for the fund managers. And all at the expense of the poor clients.

See what a racket the financial markets/industry is if you peek below the surface.....

 

[meanreversion]

Don't these investors realise that the word "gullible" has been removed from the dictionary

 

[anley]

Don't these investors realise that the word "gullible" has been removed from the dictionary

Most of the money invested in hedge funds is institutional so the real clients don't know what's going on.

Another thing to consider is the phrase 'hedge fund' it's a vanity phrase. People will often boast that they're an investor in hedge funds but say nothing about investing in a standard Investment Trust or basket of ETFs etc.

 

[Black Swan]

Most of the money invested in hedge funds is institutional so the real clients don't know what's going on.

Another thing to consider is the phrase 'hedge fund' it's a vanity phrase. People will often boast that they're an investor in hedge funds but say nothing about investing in a standard Investment Trust or basket of ETFs etc.

Hedge funds do nothing *clever*, unless surrounding themselves in mysticism counts...Trillions injected into the economy? Let the games commence, then it's simply a game of survival of the fittest, or the best connected...including Madoff...

 

[meanreversion]

I remember reading something a few years back about how pension funds had started to invest in hedge funds, that never sounded that sensible to me.

Mind you, what DOES one invest in these days? Government debt? Gold? BP shares (nice dividend and all)?

 

[MrGecko]

Mind you, what DOES one invest in these days? Government debt? Gold? BP shares (nice dividend and all)?

How much longer will Cash be King??

 

[meanreversion]

Cash is Trash.

Actually, I didn't realise until recently that one is OBLIGED to accept legal tender in return for goods or services provided. E.g. let's say inflation is 1,000 pct and GBP is in freefall, a hotelier still has to accept sterling as payment.

Now, that is an exaggerated scenario of course, but it means the government get to impose a non-backed currency on the population. They are also free to generate as much additional currency as they require, although the bulk of money creation is from banks themselves (fractional reserve banking).

 

[Black Swan]

How much longer will Cash be King??

hmmm...just got to wonder how joe six pack will react when he wakes up to fact that the govt/central bank/semi legal money printer actually robs him of his money's value every time they create more...

IMO one of the best investments (once simplified) for J6P would be converting his dollars/great british pounds into other currencies...real pandaro's box that one for govt's to cope with. "Heh Joe, so you got 1.8% interest on your cash last year, but it actually devalued by 5.8% due to; inflation, Q.E., tarp, and various bank rescues. Look at what you could have won had you put it in a basket of; yen, loonie, swissys and aussie dollars and stuffed it all under your mattress..." Ssshhhh.... :-0

 

[anley]

Cash IS king in a deflationary economy. Trouble is we don't know yet which one we're in. Very confusing signals and one can easily make a good case for either inflation or deflation.

 

[counter_violent]

To make profits they have to be invested...long short it does'nt matter.
No way if I was running a fund would I be fully invested or anywhere near it...theres just too much potential risk...even in good times.

No position is a valid position. They would do well to remember that.

 

[wackypete2]

Most hedge fund managers are no better than your average punter. They are out to make as much money as possible since there's no risk to them (it's not their money). They pocket millions if their fund thrives or else just move on if the fund collapses, still having made their huge salary. ANYONE on this forum can do exactly the same thing with someone else's money that they don't have to be held personaly accountable for it.

Peter

ADDED: If they understood leverage the big brokerage houses wouldn't have went under or nearly collapsed. Sorry for me pessimism here but I just look down on someone who calls themselves a hedge fund manager. In fairness though, I did not say ALL HFM's...just many of them.

 

[Black Swan]

Cash IS king in a deflationary economy. Trouble is we don't know yet which one we're in. Very confusing signals and one can easily make a good case for either inflation or deflation.

Cash is always King, just depends on which currencies...when that choice is over we are all well and truly fooked...

 

[meanreversion]

Most hedge fund managers are no better than your average punter. They are out to make as much money as possible since there's no risk to them (it's not their money). They pocket millions if their fund thrives or else just move on if the fund collapses, still having made their huge salary. ANYONE on this forum can do exactly the same thing with someone else's money that they don't have to be held personaly accountable for it.

Peter

ADDED: If they understood leverage the big brokerage houses wouldn't have went under or nearly collapsed. Sorry for me pessimism here but I just look down on someone who calls themselves a hedge fund manager. In fairness though, I did not say ALL HFM's...just many of them.

Wait a minute, I'm not blinded by hedge funds but to say 'it's not their money' is incorrect. One of the main criteria investors look for is financial commitment from the fund owners, and that's usually there in spades. If you're talking about a PM, ok that's different, they might just be swinging for it.

Furthermore, I would hasten to guess that the average HF punter knows a lot more about trading than the average t2w punter.

Yes, they're in it to make as much money as possible, but the investors are partially culpable as they're the one putting the money in.

I read a day ago that inflows to HF have been strong this year, and they're back to levels of a year ago. There are some very good funds out there, maybe the credit crunch was necessary to get rid of the flotters?

Having said that, I won't be investing in a HF. 20 pct of profits? Sheesh!!