Comments on: The Hedge Fund Disconnect

By: Barret

Barret — Wed, 19 Nov 2008 20:03:25 +0000

I am surprised to see such a generalized viewpoint given such validity.
by you Mark. Most Hedge funds have lock up periods shorter than 1 year. Those
managers with proven long term track records can convince investors to lock
up their investment, because their track records suggests they wont swing
for the fences 1 time to make a killing.

By: Doug M

Doug M — Wed, 19 Nov 2008 00:46:30 +0000

Congress and the S.E.C. should dig deeper since most hedge funds are bought with the “help” of some advisor. On the institutional side, a lot of wining and dining of pension fund committees has led to hedge fund managers putting the retirements of employees and university endowments at risk. For individuals, a lot of brokers and other financial salesmen should be held accountable for putting clients into investment funds with one-sided fee arrangements and mis-matched time horizons. I agree that full disclosure in and transparent exposure solves a lot of problems, so why doesn’t the hedge fund inquisition delve more deeply into the good ‘ol boy distribution network? Or would that take the inquiry too close to Goldman Sachs, Morgan Stanley, and a large number of union-associated fund consultants who also happen to be large donors to Congressional candidates? Individuals need to be held accountable – but so, too, do their advisors.

By: Buck Woodford

Buck Woodford — Tue, 18 Nov 2008 21:22:42 +0000

The last two commenters — Nick, and Da’vid A — hit several nails on the head.

I want to make several points: the main one being that the ideal fund investment these men discuss does exist. There are certainly others, but my firm is one of them.

We manage separate client accounts, but all get the same investments pro-rata. I invest capital as if we were a fund. But clients have full access to see both the value of their account and the investments held. It’s 100% transparent. My firm also does not have any “lockup” provision — clients have the right to walk away anytime.

We settle up every quarter, and of course use a high water mark as any respectable manager would. This means that the timeframe mismatch Nick mentioned truly does not apply to firms like mine. If we were to lose a lot of client money — they’d leave, no strings attached. . The risks are rewards are very appropriately aligned.

That said, performance-based fees are in my opinion by far the best way to compensate your investment managers. The rationale is obvious and needs no further explanation. .

It’s a mistake to group all hedge funds or all peformance-fee-based managers into this negatively-viewed camp. My firm is one of several that offers clients full transparency and an alignment of interests not found at most mutual fund shops. I’m motivated to kick ass for clients, and am proud of our official 2 1/2 year record of nearly 10% IRR.

Our firm’s summary can be found at http://www.teewinot.us/FactSheet.pdf .. in case you’re interested.

By: DA'VID A

DA'VID A — Tue, 18 Nov 2008 15:15:34 +0000

Not all hedge funds have lock in periods. I know of new funds that
liquidate every 3 months. and don’t forget high water marks.
In these times, an investor needs to not only looked for a fund that
is performing(there are some that are with no down months in 2008)
but one that has no lock in periods and full transparency.
That is the only way to be attractive right now because these
are changing times. That will be the norm eventually.
In regards to the credit companies, no they do not hold a gun to the
persons head but they do spend a lot of money on marketing
that will influence people who are not discipline to handle credit
cards. It’s similar to writing those sub prime loans. The credit card
companies have their hand in the congress’ pockets and get them to
pass favorable laws that go against the consumer. There should be
be more oversight on the credit card industry.

By: Nick Thomas

Nick Thomas — Tue, 18 Nov 2008 04:15:43 +0000

I am a financial advisor here in town and have been pounding my fist on the table for years arguing this point. Good questions Mark. Check out the compensation structure for the Mutual Fund managers at American Funds http://www.americanfunds.com. They are paid on rolling 4 year averages were most managers at both the hedge fund and mutual fund level are paid on their past 1/4 of performance. American Funds managers do not have the luxury of making this years shitty return magically disappear when the calendar rolls from 2008 to 2009. They must live with their performance for the next 4 years so they are forced to act like LONG TERM investors and not “in it for my self and myself only” traders.

I hope that this helps guide people to the right place and away from hedge funds in general.

By: dave

dave — Tue, 18 Nov 2008 00:46:44 +0000

I have to disagree with your statements. This is still the United States and (for now) people can still make a living. If investors think that 2/20 or hell, even 3/30 is reasonable, then so be it.

I would never pay those fees, but obviously a lot of wealthy people do.

By: Jeff Mitchell

Jeff Mitchell — Mon, 17 Nov 2008 17:43:28 +0000

More than likely anyone reading this blog is aware how dilutive PIPE deals can be. If I just invested a large sum of money in a company and they immediately went out and, essentially behind my back, diluted the heck out of me, I’d feel betrayed and want to dump all my stock and wash my hands of the entire company as well. However, I’m not qualified to offer any opinion on the “right” way to dispose of such shares. Perhaps others here are.

By: joseph

joseph — Mon, 17 Nov 2008 17:13:08 +0000

Nice discussion. I also don’t think government regulation of the merits of a particular HF compensation structure is the way to go; however, disclosure requirements may not be a bad idea. On the other hand, if disclosure requirements are mandated as with mutual funds and securities generally, the HF as an investment strategy may lose one of it key strategic advantages – stealth. What begins as a mere requirement that HFs disclose their management compensation structures may turn gradually morph to include myriad other disclosure requirements. Generally, the wealth and sophistication of the investors in HFs is thought sufficient to protect their own interests. Be careful about inviting the government into the process because, once in, beuraucrats (eager to advance their carreers and grow their own names and power) will find new way to “help” the HF market operate more “efficiently” or with “a more level playing field.” Give an inch, they may take a mile.

By: Jeff Mitchell

Jeff Mitchell — Mon, 17 Nov 2008 16:54:28 +0000

SEC Files Insider Trading Charges Against Mark Cuban
http://www.sec.gov/news/press/2008/2008-273.htm

The usual caveats apply: innocent until proven guilty, there are two sides to every story, always keep an open mind, etc.

By: R Dean

R Dean — Sun, 16 Nov 2008 05:04:28 +0000

Cuban – Not sure why you have a problem with Hedge Funds, unless you happened to have picked the wrong one, or maybe you are jealous that these smart managers actually make more money than you. The risk adjusted returns for many of these investment limited partnerships significantly outperform any other investment alternative. Just like anything else, there are some good product/managers and there are some bad products/managers. Every investor in these partnerships is required to sign the partnership agreement that identifies every risk under the sun in addition to the suitability questionnaire. Why don’t you stop bashing a great industry that has made billions for investors, the entrepreneurs and employees that manage the funds, the government that reaps the benefits thru taxes. What happened to capitalism?