Comments on: Are Hedge Funds a Scam? http://www.nakedcapitalism.com/2008/03/are-hedge-funds-scam.html Sun, 22 Nov 2009 07:56:24 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Anonymous http://www.nakedcapitalism.com/2008/03/are-hedge-funds-scam.html#comment-5501 Anonymous Thu, 20 Mar 2008 15:06:00 +0000 http://www.nakedcapitalism.com/2008/03/are-hedge-funds-a-scam/#comment-5501 -after suspecting for years, the data and now even the informed opinion confirms that hedge fund fee structure is un-sustainable.<br/><br/>- what bothers me more is why are institutional investors so willing to turn a blind eye to logic and confirming data?<br/><br/>- And why are the stake holders in the institutional investors (teachers, retirees, employees) not demanding more accountability from their investment managers? -after suspecting for years, the data and now even the informed opinion confirms that hedge fund fee structure is un-sustainable.

- what bothers me more is why are institutional investors so willing to turn a blind eye to logic and confirming data?

- And why are the stake holders in the institutional investors (teachers, retirees, employees) not demanding more accountability from their investment managers?

]]> By: Mark Wadsworth http://www.nakedcapitalism.com/2008/03/are-hedge-funds-scam.html#comment-5494 Mark Wadsworth Thu, 20 Mar 2008 11:17:00 +0000 http://www.nakedcapitalism.com/2008/03/are-hedge-funds-a-scam/#comment-5494 Why on earth does it take two economics professors and the FT's deputy-editor to suss this out? <br/><br/>I recommend Pommygranate's post <a HREF="http://pommygranate.blogspot.com/2007/08/ten-things-you-should-know-about-hedge.html" REL="nofollow">'Ten things you should know about hedge funds'</a>. Why on earth does it take two economics professors and the FT’s deputy-editor to suss this out?

I recommend Pommygranate’s post ‘Ten things you should know about hedge funds’.

]]> By: Anonymous http://www.nakedcapitalism.com/2008/03/are-hedge-funds-scam.html#comment-5474 Anonymous Wed, 19 Mar 2008 20:45:00 +0000 http://www.nakedcapitalism.com/2008/03/are-hedge-funds-a-scam/#comment-5474 cassandra is right, borrow some of that mortgage securitization technology and make the HF the junior piece in the capital structure, not pari passu with the limied partners. So Meriweather's limited partners wouldn't take a hit until a good chunk of the accumulated IC was chewed up by losses. HFs are partnerships, and the partners should take the first loss when it comes... cassandra is right, borrow some of that mortgage securitization technology and make the HF the junior piece in the capital structure, not pari passu with the limied partners. So Meriweather’s limited partners wouldn’t take a hit until a good chunk of the accumulated IC was chewed up by losses. HFs are partnerships, and the partners should take the first loss when it comes…

]]> By: Matt http://www.nakedcapitalism.com/2008/03/are-hedge-funds-scam.html#comment-5469 Matt Wed, 19 Mar 2008 19:51:00 +0000 http://www.nakedcapitalism.com/2008/03/are-hedge-funds-a-scam/#comment-5469 Apparently you can run this scam over and over: (from Bloomberg) -- JWM Partners LLC, the investment firm run by ex-Long-Term Capital Management LP chief John Meriwether, lost 24 percent in its $1 billion fixed-income hedge fund this year through March 14, according to two people with knowledge of the matter. <br/><br/>Meriwether declined to comment. <br/><br/>JWM: "Ok, Ok, THIS TIME I'll get it right!" <br/><br/>My guess he isn't hurtin' too badly personally since there isn't a clawback on his prior years' fees. Run this scam often enough and you can live pretty comfortably. Apparently you can run this scam over and over: (from Bloomberg) — JWM Partners LLC, the investment firm run by ex-Long-Term Capital Management LP chief John Meriwether, lost 24 percent in its $1 billion fixed-income hedge fund this year through March 14, according to two people with knowledge of the matter.

Meriwether declined to comment.

JWM: “Ok, Ok, THIS TIME I’ll get it right!”

My guess he isn’t hurtin’ too badly personally since there isn’t a clawback on his prior years’ fees. Run this scam often enough and you can live pretty comfortably.

]]> By: "Cassandra" http://www.nakedcapitalism.com/2008/03/are-hedge-funds-scam.html#comment-5466 "Cassandra" Wed, 19 Mar 2008 16:24:00 +0000 http://www.nakedcapitalism.com/2008/03/are-hedge-funds-a-scam/#comment-5466 i don't want to be arguing this side, but anon is incorrect and for the record, mgmt fees are based on capital, such that with reasonable leverage and long and short positions, such mgmt fees often translate into lower % mgmt fees per dollar of "actively managed" assets than traditional mgmt. Perf fees do have issues and there are undoubtedly more-egregious structures and less-structures. More egregious structures crystallize monthly or quarterly on accrued amounts and are on the marks though only the most egregious are on the manager's vs. 3rd party; have no high water or hurdles. The more egregious structures raise significant agent-principal issues and create bizarre incentives for HFM owners and traders alike. HF structures will survive whatever cataclysm happens, though as happens following crises, Capital will be in the driver's seat in regards to the terms in respect of the median fund, in the next round. Managers with demonstrated rarefied skill however, will continue to capture what appear to be asymmetrically generous terms, and there are few arguments to the contrary unless they can prove its luck, nefarious goings-on, or both.<br/><br/>If I were King, objectively fair incentive arrangements would include proper benchmarking, liquidity adjustments; no hard crystallization but rather trickle-crystallization of accrued incentive fees over several years that include clawbacks for subsequent losses from accrued fees. And there is no reason why a portion of mgmt fees could n't conceivably be clawed back in the event of future negative alpha, in effect insuring prem fees aren't paid for pedestrian service. Also soft-dollar arrangements should be completely banned , but that is not limited to HFs... i don’t want to be arguing this side, but anon is incorrect and for the record, mgmt fees are based on capital, such that with reasonable leverage and long and short positions, such mgmt fees often translate into lower % mgmt fees per dollar of “actively managed” assets than traditional mgmt. Perf fees do have issues and there are undoubtedly more-egregious structures and less-structures. More egregious structures crystallize monthly or quarterly on accrued amounts and are on the marks though only the most egregious are on the manager’s vs. 3rd party; have no high water or hurdles. The more egregious structures raise significant agent-principal issues and create bizarre incentives for HFM owners and traders alike. HF structures will survive whatever cataclysm happens, though as happens following crises, Capital will be in the driver’s seat in regards to the terms in respect of the median fund, in the next round. Managers with demonstrated rarefied skill however, will continue to capture what appear to be asymmetrically generous terms, and there are few arguments to the contrary unless they can prove its luck, nefarious goings-on, or both.

If I were King, objectively fair incentive arrangements would include proper benchmarking, liquidity adjustments; no hard crystallization but rather trickle-crystallization of accrued incentive fees over several years that include clawbacks for subsequent losses from accrued fees. And there is no reason why a portion of mgmt fees could n’t conceivably be clawed back in the event of future negative alpha, in effect insuring prem fees aren’t paid for pedestrian service. Also soft-dollar arrangements should be completely banned , but that is not limited to HFs…

]]> By: Anonymous http://www.nakedcapitalism.com/2008/03/are-hedge-funds-scam.html#comment-5461 Anonymous Wed, 19 Mar 2008 14:43:00 +0000 http://www.nakedcapitalism.com/2008/03/are-hedge-funds-a-scam/#comment-5461 Hey, it's a great scam, especially now that that one-in-ten year has finally arrived, they have the federal government to bail them out. Hey, it’s a great scam, especially now that that one-in-ten year has finally arrived, they have the federal government to bail them out.

]]> By: Anonymous http://www.nakedcapitalism.com/2008/03/are-hedge-funds-scam.html#comment-5458 Anonymous Wed, 19 Mar 2008 14:14:00 +0000 http://www.nakedcapitalism.com/2008/03/are-hedge-funds-a-scam/#comment-5458 Don't forget that the hedge fund fees of 2 and 20 (and greater)--- are based on leverage with much of the portfolio being non-exchange traded products -<br/>yes, derivatives - and levered - and subject to the manager's mark. And their fees were cash (the investors' principal) while the investor enjoyed the "paper" mark on the monthly statement. Don’t forget that the hedge fund fees of 2 and 20 (and greater)— are based on leverage with much of the portfolio being non-exchange traded products -
yes, derivatives – and levered – and subject to the manager’s mark. And their fees were cash (the investors’ principal) while the investor enjoyed the “paper” mark on the monthly statement.

]]> By: vlade http://www.nakedcapitalism.com/2008/03/are-hedge-funds-scam.html#comment-5453 vlade Wed, 19 Mar 2008 12:58:00 +0000 http://www.nakedcapitalism.com/2008/03/are-hedge-funds-a-scam/#comment-5453 Yves, I'm a bit surprised you haven't commented on this article by John Kay: http://www.ft.com/cms/s/0/1ee8f0fe-ef8b-11dc-8a17-0000779fd2ac.html<br/><br/>If things like this (i.e. actually showing the numbers, from both sides) get more mass-media coverage, it may kill the hedge fund industry faster than leverage.<br/><br/>I have to say I'm a bit disappointed with Wolf's writing in the last few months, I think the quality went downhill and the arguments aren't as well reasoned as before and, in general, not as thought-stimulating as they used to be. Yves, I’m a bit surprised you haven’t commented on this article by John Kay: http://www.ft.com/cms/s/0/1ee8f0fe-ef8b-11dc-8a17-0000779fd2ac.html

If things like this (i.e. actually showing the numbers, from both sides) get more mass-media coverage, it may kill the hedge fund industry faster than leverage.

I have to say I’m a bit disappointed with Wolf’s writing in the last few months, I think the quality went downhill and the arguments aren’t as well reasoned as before and, in general, not as thought-stimulating as they used to be.

]]> By: Ginger Yellow http://www.nakedcapitalism.com/2008/03/are-hedge-funds-scam.html#comment-5451 Ginger Yellow Wed, 19 Mar 2008 11:49:00 +0000 http://www.nakedcapitalism.com/2008/03/are-hedge-funds-a-scam/#comment-5451 It's yet another example of the self-defeating spiral that got us into this mess. Low asset yields led people to hedge funds. The pi9ling of money into hedge funds meant the funds had to lever up to generate attractive returns. The increase of leverage in the financial system pushed yields down even further and made substantial market value declines more likely even in stable asset classes. And market value declines kill leveraged vehicles. It’s yet another example of the self-defeating spiral that got us into this mess. Low asset yields led people to hedge funds. The pi9ling of money into hedge funds meant the funds had to lever up to generate attractive returns. The increase of leverage in the financial system pushed yields down even further and made substantial market value declines more likely even in stable asset classes. And market value declines kill leveraged vehicles.

]]>