A toxic name for Clinton's hedge fund
News today that Bill Clinton will be speaker at the opening for a new hedge fund in New York. It's an Austrian company to be known as Superfund Asset Management, and it aims to put hedge fund investing within the reach of your average investor (minimum holding only $5,000). Apparently the track record is pretty good: two funds started in November 2002 have returned 52% and 82%, and that's after deduction of fees. Superfund, you may remember, was the name given to a large pile of money set aside for cleanup of toxic waste dumps in the 1980s. We're hoping these hedge funds don't become too toxic for their investors.
Hedge funds, unlike mutual funds, are pretty thinly regulated. That can be good for the participants as long as the management is honest and knows what the hell it's doing. But it also gives them more room for recklessness (they may be called hedge funds, but that no longer means they've hedged their bets) and for fraud. The SEC, which is hampered by a lack of authority over hedge funds, has brought 51 cases in the past 5 years, according to the FT, with investor losses of around $1.1bn. Just last week, a new fraud came to light: some fund in Florida by the name of KL Financial apparently lost $70mm (and maybe as much as $300mm). While they were losing money hand over fist, apparently, they were boasting to their investors of annual returns in the area of 150%.
Hedge funds can put their money pretty much wherever they want, so, unlike mutual funds, they're not bound by particular markets. So their pitch is that they can make money no matter what the stock and bond markets are doing. If stocks look overpriced, they'll do commodities, or currencies, or distressed bank debt, or convertible arbitrage or whatever. I don't know what the numbers are, but they've grown tremendously in the last few years.
I'm certainly not the first one to point out that once everybody's doing it the returns are bound to go down. Worse, the management fees are much higher than you'd generally pay in a mutual fund, so you (as an investor) are starting off at an immediate disadvantage. There are even, now, "Funds of funds", which are hedge funds that invest in other hedge funds -- so the whammy is multiplied. (The last time Funds of Funds were popular, by the way, was in the go-go years of the 1960s, and the most famous Fund of Funds was IOS, the one run by Robert Vesco and Bernie Cornfeld. Bernie went to jail in Switzerland and died a few years ago. Vesco went on the lam, taking a couple hundred million dollars with him (but not before giving $200K to Richard Nixon's reelection campaign). He's in jail in Cuba now, for another fraud he perpetrated there, and due out in 2009 when he'll be almost 80. (You'd think you'd be able to stop once you had the $200 mill, wouldn't you? Check out a short bio at http://slate.msn.com/id/1007117/ ).
The SEC has a paper on hedge funds. If you're thinking about putting money in, you might want to take a quick look: http://www.sec.gov/news/studies/hedgefunds0903.pdf. The old warhorse in charge of the SEC, Bill Donaldson (yes, founder of Donaldson, Lufkin & Jenrette), is trying to get authority to regulate them more, but it's an uphill battle. A goodly portion of brokerage house fees these days apparently come from hedge funds.
Here's a quote of the day, from Anais Faraj of Nomura Securities: "We appear to be repeating the benign 'golden age' cycle that spanned 1955-74". It echoes vaguely that famous quote of Nobel prizewinning economist Irrving Fischer in 1929: "Stock prices have reached what looks like a permanent high plateau..."
Hedge funds, unlike mutual funds, are pretty thinly regulated. That can be good for the participants as long as the management is honest and knows what the hell it's doing. But it also gives them more room for recklessness (they may be called hedge funds, but that no longer means they've hedged their bets) and for fraud. The SEC, which is hampered by a lack of authority over hedge funds, has brought 51 cases in the past 5 years, according to the FT, with investor losses of around $1.1bn. Just last week, a new fraud came to light: some fund in Florida by the name of KL Financial apparently lost $70mm (and maybe as much as $300mm). While they were losing money hand over fist, apparently, they were boasting to their investors of annual returns in the area of 150%.
Hedge funds can put their money pretty much wherever they want, so, unlike mutual funds, they're not bound by particular markets. So their pitch is that they can make money no matter what the stock and bond markets are doing. If stocks look overpriced, they'll do commodities, or currencies, or distressed bank debt, or convertible arbitrage or whatever. I don't know what the numbers are, but they've grown tremendously in the last few years.
I'm certainly not the first one to point out that once everybody's doing it the returns are bound to go down. Worse, the management fees are much higher than you'd generally pay in a mutual fund, so you (as an investor) are starting off at an immediate disadvantage. There are even, now, "Funds of funds", which are hedge funds that invest in other hedge funds -- so the whammy is multiplied. (The last time Funds of Funds were popular, by the way, was in the go-go years of the 1960s, and the most famous Fund of Funds was IOS, the one run by Robert Vesco and Bernie Cornfeld. Bernie went to jail in Switzerland and died a few years ago. Vesco went on the lam, taking a couple hundred million dollars with him (but not before giving $200K to Richard Nixon's reelection campaign). He's in jail in Cuba now, for another fraud he perpetrated there, and due out in 2009 when he'll be almost 80. (You'd think you'd be able to stop once you had the $200 mill, wouldn't you? Check out a short bio at http://slate.msn.com/id/1007117/ ).
The SEC has a paper on hedge funds. If you're thinking about putting money in, you might want to take a quick look: http://www.sec.gov/news/studies/hedgefunds0903.pdf. The old warhorse in charge of the SEC, Bill Donaldson (yes, founder of Donaldson, Lufkin & Jenrette), is trying to get authority to regulate them more, but it's an uphill battle. A goodly portion of brokerage house fees these days apparently come from hedge funds.
Here's a quote of the day, from Anais Faraj of Nomura Securities: "We appear to be repeating the benign 'golden age' cycle that spanned 1955-74". It echoes vaguely that famous quote of Nobel prizewinning economist Irrving Fischer in 1929: "Stock prices have reached what looks like a permanent high plateau..."
posted by econoclast at 6:41 PM
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