What purpose do Fund of Funds serve, except to layer another fee on top of an already heavy fee.
What up ?
Whats going on?
WHATS ON YOUR MINDS?
Its an open thread!
"My formula for success is rise early, work late and strike oil." —John Paul Getty
Consumer Credit outstanding fell $14.8b in Sept seasonally adjusted, almost $5b more than expected and marks the 11th month in the past 12 of declines. At $2.456T outstanding, it is 4.9% below the record high in July '08. After a flat reading in Aug, (didn't fall b/c of the CARS program), non revolving debt outstanding fell by $4.9B. Revolving (mostly credit cards) balances outstanding fell by $9.9B. To fully put into perspective today's data, look at the current level of consumer credit (doesn't include mortgages, the biggest chunk of consumer credit) relative to GDP. As of Q3, it totaled 17.2%...
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December 15th, 2008 at 10:22 pm
I think they need to change the name “Ponzi Scheme” to “Madoff Rip-off”…Irwin Kellner, chief economist of MarketWatch and Mort Zuckerman are even ensnared. They should only throw a shoe at this guy.
Those Mets are sure charmed…2 straight collapses…Citi Field…owner maybe biggest loser in the Madoff.
December 15th, 2008 at 10:30 pm
Isn’t the whole purpose to spread risk? Imagine if all your funds was in one hedge fund that wen belly up?
December 15th, 2008 at 10:31 pm
Barry, you had it right the first time. It’s another layer of fees. That’s all.
You want to diversify? Buy an index fund.
December 15th, 2008 at 10:31 pm
they were created to employ misfits like Ron Insana. need we say more?
guidepostings.blogspot.com
December 15th, 2008 at 10:32 pm
I placed 7 orders on amazon and canceled 3 because, as I discovered tonight, the stuff in your shopping cart is no longer sacred. What are the internets coming to? Also, I can’t believe how much garbage amazon throws at you on every page. I honestly couldn’t find the lists I’d made of planned purchases I’d stored on the site because of the deluge of advertisements for things I didn’t want. [Insert more complaining here].
December 15th, 2008 at 10:40 pm
Barry, this is a bloody stupid topic and if I didn’t know otherwise, I would think you have an agenda. What’s the point of anything? What’s the point of a restaurant when you can cook at home? What’s the point of a supermarket when you can grow your own food? What’s the point of a taxi service when you can drive? What’s the point of Social Security when you can save and invest yourself? What’s the point of watching a movie when you can read? What’s the point of a brick and mortar store when you have the e-stores and vice-versa? What’s the point of a blog when you can do your own research?
This list can go on and on.
The Madoff episode – and let’s remember Madoff WAS NOT a hedge fund – is that investors need specialists in order to due diligence on investments and structure portfolios. Clearly there are firms that do it well and firms that don’t do it well. Remember, it was the Fund of Fund firms who were screaming to the SEC that Madoff was a fraud. Yes, if you were with these Connecticut firms which had Madoff, dump those losers if the Press is correct. But don’t dump the asset class, that’s amateurish.
Now yes, the future of the prototypical “Fund of Funds” is murky. Clearly having co-mingled accounts which combine high net worth investors, pension funds, et al is not a good idea. The level of sophistication and time horizon of the various types of investors is not conducive to a stable platform. The hedge fund industry would be better served putting a) stricter terms on investors to weed out the hot money and b) just working on a managed account basis so that “YOU” own the account and have full transparency.
But there are a great number of Fund of Funds professionals who are experts on various Alternative Investments. There were a number of Endowments, Foundations, and even Pension funds who thought they could do it themselves and have had their balls cut off this year. They realize that it takes a much more substantial staff and better paid individuals to evaluate complicated investments. I suspect the smart people who see the opportunity setting itself up in a multiple-strategy hedge fund portfolio sometime in 2009 are going to utilize these Fund of Funds firms in order to cover their own asses in the future as well…
December 15th, 2008 at 10:57 pm
I guess they serve the purpose of pulling the panicking herd one step further back from direct stock ownership. That has to add a degree of stability in stock ownership for the rest of us. Of course, for those of us that make their money from the extremes the panicking herd creates when they are on a rampage up and/or down, it makes our jobs a little harder.
A mutual fund manager is only a ’smarter than you stock picker’ when he is not overwhelmed by redemptions from people that are dumber than him. If those redmeptions are filtered by the minimum cash levels of a fund of funds before they hit the minimum cash levels of the front line funds then that should slow the tide in the markets a bit. I’m also willing to suffer the crowd paying an extra level of fees for that. I don’t mind, really
December 15th, 2008 at 11:03 pm
Shouldn’t there be a fee-generating thread of threads for this topic?
December 15th, 2008 at 11:06 pm
molten_
welcome to the dawning of a new consciousness..
this ethereal land of spaghetti-wires wasn’t called the ‘World Wide Wiretap’–before they invited los Publica in– for nothing, you know..
December 15th, 2008 at 11:08 pm
>You want to diversify? Buy an index fund.
Most people do and that’s why they took it in the shorts during this downturn. I’m afraid there are few ways to avoid being the sucker if you are a passive investor (billionaires become passive investors out of necessity…they just can’t manage all of that money on their own).
December 15th, 2008 at 11:10 pm
A thought before bed. How many hedge funds are there? Hundreds? Thousands? And Madoff was the only one that figured out how to run this kind of Ponzi scheme? Not likely.
Pleasant dreams.
December 15th, 2008 at 11:13 pm
“I’m afraid there are few ways to avoid being the sucker if you are a passive investor”
hmm, passive ‘investors’ in autos? have auto insurance. in houses? home owner’s insurance..
hopefully active–investors in themselves? life insurance. passive investors in Weather? yep, you get the drift.
LSS: Buy some f’in Puts.
December 15th, 2008 at 11:32 pm
I think I expressed this sentiment before (back in July):
It all feels fake. The roll off in volatility, the market rallying on bad news last week, commodities down, treasuries up. An eclectic mix of air pockets and bubbles. And the really weird part, for me, is I don’t feel like all hell’s about to break loose (which usually means all hell’s about to break loose).
The other thing on my mind is why is it so hard to get a frickin’ tree to stand up in my living room?
December 15th, 2008 at 11:38 pm
Everyone thought the SEC was asleep at the switch. They were just after bigger game:
SEC sues National Lampoon for stock manipulation
http://www.reuters.com/article/ousiv/idUSTRE4BE6BV20081215
Why, this outrage must have cost investors at least .1% of what Madoff stole.
December 15th, 2008 at 11:39 pm
The other thing on my mind is why is it so hard to get a frickin’ tree to stand up in my living room?
M McH,
Plumb, it’s not just for ‘Bob’, anymore..
IOW, take the Tree’s natural imperfection/eccentricity into account when tappin’ your bore hole..
if it’s too late for that, that’s what fishing line, at this of the year, is ‘really’ for..iffin’ your out of ‘hooks’ that you can pound into a stud, fashion one from a nail..sadly, though, if you looking to mount that thing in the middle of a room w/ high ceilings…better luck next year, or settle for a tree that’s a half-a-foot shorter and redrill..
December 15th, 2008 at 11:40 pm
The first time I heard about these “fund of funds” was three years ago…a friend introduced me to one of his old buddies that did this emerging business. First of all, the guy was one of the biggest D-bags I had ever met. And then when I thought about the actual business of F of F and the fees, I just thought it was a ridiculous business model. Who would possibly pay all of these fees? The kind of performance you need to keep up with the fees would be staggering.
Quite frankly, the whole thing is a matter of too many dollars chasing too little trading talent. I often remarked to trader friends over the years during the hedge fund rush: “There is simply NOT enough good traders to support all of these hedge funds and banks.”
The big funds drained the brains from the banks and what did you end up with? A bunch of sheep herds in banks that couldn’t trade their way out of a broom closet and ZERO appreciation for risk. Every decent trader has an ‘instinct’ about how much risk they have on, regardless of what the VAR models were forecasting. These sheep actually believed their models….
- AT
December 15th, 2008 at 11:41 pm
Ron Insana was in that business, but he couldn’t make it:
http://www.nytimes.com/2008/08/19/business/19sorkin.html?_r=1&partner=rssuserland&emc=rss&pagewanted=all
December 15th, 2008 at 11:42 pm
Mike in Nola Says:
remember, Leona Helmsley was incarcerated for one reason, and one reason only: She gave Voice to the Reality of the Racket..
December 15th, 2008 at 11:49 pm
AT,
with this Q: “Who would possibly pay all of these fees? The kind of performance you need to keep up with the fees would be staggering.”
see:
debreuil Says:
December 13th, 2008 at 4:13 pm
The party is over!
The party is over!
The party is over!
However, my friends and I have an alternative party you might be interested in. It will be different this time. Just bring a few cool million and we’ll set you up…
PS we are moving from permanent box seats to my basement because of the commute, really.
and, with this: “A bunch of sheep herds in banks that couldn’t trade their way out of a broom closet and ZERO appreciation for risk. Every decent trader has an ‘instinct’ about how much risk they have on, regardless of what the VAR models were forecasting. These sheep actually believed their models….”
“These sheep actually believed their models”–was, exactly, what they were bred for. Genetic Engineering at its finest–Sadly, those ’spring revere ‘Dolly’, not Dolley Madison..
December 15th, 2008 at 11:57 pm
The answer depends… For example, funds of hedge funds can provide investors exposure to a particular class of alternative investments that they may not otherwise have the ability to because of capital requirements, etc. Asset allocation is another potential value-add of fund of funds requiring an additional fee. Obviously from the view point of a financially savvy individual, funds of funds can be inappropriate relative to their own investment profile given that they are well informed with their own allocation needs, but for uninformed individuals, funds of funds can provide that service. Another value-add is the potential diversification among fund managers, who can be prone to their own subjective biases. The list goes on, but the point is that funds of funds need to be considered in the context of the value of their services and the corresponding fees. Casting a vague universal judgment on a diverse investment class without considering its respective benefits to a universe of unique individual investors is misguided and uninformed.
December 15th, 2008 at 11:58 pm
Wall Street – to paraphrase Milton Friedman, – is always and everywhere are marketing institution.
They’re like bottled water. The beverage companies had this distribution channel and people like water… poof! Sell it to them. It’s simple re-disintermediation.
December 16th, 2008 at 12:02 am
mark mchugh @ 11:32
Maybe all hell will break loose in the second or third week of January.
December 16th, 2008 at 12:09 am
ChrisH:
I agree with most of what you’re writing here. You make good points. My issue is the “value added” service these institutions are providing are NO WHERE near the prices they’re charging. That being said, the hedge fund model of 2/20 always seemed pretty steep. I never understood how some wunderkind out of GS could think he could charge 2/20 without a longer track record. It seems like in a “real” market for these kinds of services you would have a wide array of compensation structures depending on how successful you were. But in this bizarro world, the hedgies thought that 2/20 was some sort of birthright, with rates going higher from there.
But hey, there was a market for it all and investors jumped in…so who cares. Caveat emptor.
- AT
December 16th, 2008 at 12:12 am
Mark mchugh on Xmas Trees….
It’s an art getting a tree up straight. My best successes come when i leave the tree laying in the truck and put the stand on when the tree is horizontal. Then do some minor pushes and pulls to get ‘er done straight!
December 16th, 2008 at 12:13 am
Here is an idea that I am doing that is somewhat creative. I am opening an account for a self-directed IRA that allows you to invest in real estate, notes and other non-traditional products. For the past five years I have done well helping to fund a team of real estate agents to buy and sell foreclosed properties. Since my loan is very well secured with personal guarantees and mortgages, I feel comfortable with the 10% interest I am getting for a one year note. The change I am making though will be as follows: I will divide the note up this way, $500,000 from this new IRA SEP earning 18.64% and another $500,000 personally earning only 1.36% which average out to the 10%. The 1.36% is the lowest inputed interest charge that the IRS will allow. This will save me over $20,000 a year in taxes currently and shift the burden down the road. I am in my early 50’s so can benefit from this approach for the next 20 years until age 72. The extra compounding will be huge. What do you think of this idea?
December 16th, 2008 at 12:26 am
My Bad,
I was referring to the mutual funds and not the hedgies like you. The principle of the post is still the same. I’ll blame poor man’s mindset construct
December 16th, 2008 at 1:33 am
sheep need shepherds no? you can tell the sheep they don’t, but they’ll never believe you. so let the shepherds have their way ‘em. serves ‘em right. stupid sheep.
December 16th, 2008 at 1:41 am
Not a “fund of funds” comment, but a Madoff comment. My Spidey sense tells me that there will be a huge ripple effect from the Madoff debacle. My concern is that it will be a replay of the Lehman Bros. effect, where it is not necessarily the demise of the one entity that is the problem, but the effect that demise has on the other players in the game. If a “Fund of Funds” has Madoff in their “fund”, then the losses they suffer from Madoff problem makes their returns go down, forcing redemptions, causing more dominos to fall in the investment community.
We have been waiting for another shoe to drop, however, this is a suprise, and we may find that this market is like a horse with horseshoes, that has three more “shoes to drop.”
December 16th, 2008 at 1:46 am
i always thought “target funds” were a rip-off too.
December 16th, 2008 at 5:57 am
I’m scrapping the fund of funds of funds I was going to start. I don’t know what I would do without you guys.
December 16th, 2008 at 6:25 am
I kid you not, last year my firm was solicited by a fund-of-fund-of-funds firm. The sales pitch went something like “after extensive research, the sponsors really believe one cannot get the requisite diversification from a mere fund of funds approach,” and you can guess the rest.
December 16th, 2008 at 6:35 am
It is obvious this morning, after Tremont, a frickin’ hedge firm advisory group, had massive amounts in the Madoff that the corruption is more widespread. Nobody is that stupid. People were getting “paid off ” massively to steer money to “Made-off”.
December 16th, 2008 at 7:39 am
SB,
no kidding, here’s from Bloomberg:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aqfr8yxohYEA&refer=home
Dec. 16 (Bloomberg) — Tremont Group Holdings Inc., a hedge- fund firm owned by OppenheimerFunds Inc., had $3.3 billion, or more than half its total assets, invested with Bernard Madoff, according to a person familiar with the matter.
Tremont’s Rye Investment Management unit had $3.1 billion, virtually all the money the group managed, allocated to Madoff, said the person, who declined to be identified because the information is private. Tremont had another $200 million, or about 7 percent of its total assets, invested through its fund of funds group, Tremont Capital Management.
Tremont, which manages a total of $5.8 billion, would have made roughly $62 million this year peddling funds that are solely run by Madoff, who was arrested Dec. 11 after he allegedly confessed to running a “giant Ponzi scheme” that may have bilked investors out of $50 billion. Hedge funds that invested with the 70-year-old Queens, New York-native charged fees to their clients for the task of vetting the fund.
“We believe Tremont exercised appropriate due diligence in connection with the Madoff investments,” the firm said today in a statement. Tremont parent OppenheimerFunds is a unit of Springfield, Massachusetts-based Massachusetts Mutual Life Insurance Co. …
Tremont Invested More Than Half Its Assets With Bernard Madoff
By Katherine Burton
December 16th, 2008 at 8:33 am
“Funds of fund” serves theses 3 purposes, as nearly every financial innovation :
1) fees, has you mentionned
2) regulatory arbitrage (some regulated institution uses those funds to invest indirectly in risky assets
3) higher leverage (the old “holding” sheme, used in finance since the 1920’s…)
December 16th, 2008 at 8:48 am
mostly bs. as you pointed out an extra fee for not much. also shows how lazy re due diligence investors were. always happens near the end of up cycles as money chases perceived performance without questioning underlying assumptions.
December 16th, 2008 at 8:48 am
The reason funds of funds existed is that some not very bright people had way too much money.
Now that’s being rectified.
December 16th, 2008 at 9:11 am
The added layer of fees issue can be avoided simply by using Vanguard Target Retirement Funds. There are actually people out there who look at their quarterly 401(k) statements and sell the funds that are “losing” and buy the funds that are “gaining.”
When these people see just one fund, the volatile price swings are smoothed out and panic is reduced; thereby, minimizing the human nature to “buy high and sell low.”
With that said, however, I do not use funds of funds personally or recommend them to clients…
December 16th, 2008 at 9:34 am
@ Melvis 12:13 AM
I’m in the process of doing the same, with my funds as well as some family. Buying distressed commercial notes in bulk, and lending in the same capacity as you. I have a couple questions about your structure; I’d be very interested in chatting with you about it. Drop me an e-mail if you don’t mind. chris-AT-sbjcompanies-DOT-com
December 16th, 2008 at 9:51 am
It’s all about the fees, baby…
In the case of Madoff it may also have been about recruiting and setting up the patsies…..
December 16th, 2008 at 9:56 am
I just got in on a wicked sweet Fund of Fund of Funds. obviously, it’s levered up too: a 3x version of the basic Fund of Funds. more leverage and more funds is always better
December 16th, 2008 at 10:11 am
MarketWatch just lost its last shred of credibility, two of their guys got taken by this shyster.
Now who would ever want to read advice from these people after that?
BTW, a lot of these people got set up while plaing golf. Leftback prefers to play his golf at Van Cortland Park or Split Rock in Da Bronx rather than Boca Rio Country Club. A few people have asked me for some money there over the years but it was mainly quarters. It’s actually much preferable to walk the course with real golfers than sit in a cart behind a bunch of wrinklies in visors.
December 16th, 2008 at 10:16 am
Who is kidding who? In my opinion, this is the real story. This guy Madoff lost billions of his clients money like all the hedge funds. Those losses are not covered by any agency. Only fraud is covered. So what do you do? I think that Madoff is just a fall guy. The losses of his fund were the same as other funds, mutual and hedge and personal losses. By saying it was a Ponzi scheme (fraud) by this one guy all those rich investors will be covered from their losses unlike the rest of the world. .
December 16th, 2008 at 10:43 am
I’m amazed the markets have completely shrugged off the strongly worded comments from Best Buy’s Anderson (among other things) about a ‘dramatic and potentially long lasting shift in consumer behavior’. Do the majority of market participants really feel that a) things won’t get much worse, and b) there won’t be significantly cheaper buying opportunities in 2009?
Scratching my head these days. I’ll make sure to tell you guys with I take off all of my shorts and puts – 48 hours after that, we will start the next huge leg down.
December 16th, 2008 at 10:44 am
@ jckgas: educate me please – who ‘covers’ or ‘insures against’ fraud within unregulated hedge funds???
December 16th, 2008 at 11:17 am
hedgefundguy,
[Barry, this is a bloody stupid topic and if I didn’t know otherwise, I would think you have an agenda. What’s the point of anything? What’s the point of a restaurant when you can cook at home? What’s the point of a supermarket when you can grow your own food? What’s the point of a taxi service when you can drive? What’s the point of Social Security when you can save and invest yourself? What’s the point of watching a movie when you can read? What’s the point of a brick and mortar store when you have the e-stores and vice-versa? What’s the point of a blog when you can do your own research?]
Honestly, 3/4 of the hedge fund SHOULD go out of business, ESPECIALLY fund of funds. Tell me when is being the middle man a viable business model ? Never!
A majority of hedge fund can’t even navigate a bear market!! That’s shameful!!! Tell me how you can call yourself a “HEDGE” fund. Today’s hedge funds are, was, nothing more than leverage gamblers who got lucky because they caught the peak of the credit bubble. Once leverage is gone, where is the return ? True alpha is difficult isn’t ? Take away the beta and you got zilch!
I have ex-colleagues who can’t tie their own frikkin shoelaces started funds. Where are they now ? Trying to raise capital as their former client redeem to the point where the existing capital is nearly depleted. Hedge fund manager ? Give me a break! When 10,000 funds all vying for a pie with similar strategies, example are the quant funds that blew up in this debacle because they were all long/short similar stocks, you think everyone is as smart as they think ? Please, hedge funds are a penny a dozen. BTW, I am in the hedge fund industry and I see craps that are passed for gems. Now we know who are swimming naked.
December 16th, 2008 at 11:27 am
CPJ13,
see: Madoff Investors May Be Protected By Government
Judge Says Those Duped Need Aid Under The Securites Investor Protection Act
Timeline: U.S. Credit Crunch & Financial Failures
View Market Summaries & Leading Stock Changes
Reporting
John Slattery NEW YORK (CBS) ― Federal investigators remain at the investment offices of disgraced investor Bernard Madoff, scouring through records to learn the scope of what may be the biggest Ponzi scheme ever in the United States.
The numbers are staggering, the losses far-reaching, but help may be on the way for investors thanks to an order for protection from a federal judge.
The scheme was operated out of the so-called “Lipstick Building” on Third Avenue. Bernard Madoff Investment Securities LLC occupies three floors and may have bilked investors of $50 billion.
Prosecutors say it was a classic Ponzi scheme. The firm paid-off earlier investors with money from new investors. It collapsed amid a nervous economy when some people wanted their money out.
“I believe he was a polished, polished, highly sophisticated schemester,” said investors’ attorney Mark Mulholland.
Mulholland’s Long Island firm represents some 100 investors that could grow to several hundred who claim they lost millions.
“University endowments, pension funds; the scope seems to be limitless and affects little people too,” says Mulholland.
In addition to publisher Mort Zuckerman; Fred Wilpon, owner of the Mets; former Philadelphia Eagles owner Norman Braman; there were the modest investors who put their faith in Madoff.
“We lost our life savings,” said investor Joan Sinkin.
Brooklyn transplants to Florida, Sinkin and her husband Arnold said they lost 85-percent of a nearly $1 million investment.
“We were able to do things to enhance our retirement. Then in 72 hours, we were bankrupt,” she said.
It’s charged at least 50 charities were bilked, including a charitable fund set-up by the family of Senator Frank Lautenberg of New Jersey.
Meanwhile, a federal judge on Monday threw a lifesaver to investors who may have been duped, saying they need the protection of a special government reserve fund set up to help investors at failed brokerage firms.
U.S. District Judge Louis L. Stanton ordered that clients of Madoff’s private investment business seek relief under a federal statute created to rescue cheated investors. Stanton also ordered that business be liquidated under the jurisdiction of a bankruptcy court and named attorney Irvin H. Picard as trustee to oversee that process.
Stanton signed the order after the Securities Investor Protection Corporation asked that steps be taken to protect investors in the scheme, which has ensnared several major banks and prominent figures as victims and could result in as much as $50 billion in losses.
Congress created the SIPC in 1970 to protect investors when a brokerage firm fails and cash and securities are missing from accounts. Funds can be used to satisfy the remaining claims of each customer up to a maximum of $500,000. The figure includes a maximum of up to $100,000 on claims for cash.
The order came just days after federal prosecutors charged Madoff with securities fraud, saying he had admitted to orchestrating a massive Ponzi scheme. Madoff is free on $10 million bail after he was charged with securities fraud last week. …
http://wcbstv.com/business/madoff.ponzi.scheme.2.888036.html
December 16th, 2008 at 11:35 am
[puke] I had heard rumors of this, but was unaware of the judge’s edict. I will lose my f’ing mind if these people receive relief under the guise of SIPC.
Whatever. Nothing I can do about it anyway – where.will.it.end??
December 16th, 2008 at 11:53 am
are we going to break teh 50DMA in the SPX today after the announcement? If so, what does that mean?
December 16th, 2008 at 1:25 pm
Mark McH
The other thing on my mind is why is it so hard to get a frickin’ tree to stand up in my living room?
Use a 2 x4 and a 5-gal plastic pail
Cut 2 x 4 just short enough to fit in the bottom of pail.
Screw 2 x 4 to butt end.
Trim off lower branches to clear the top of the pail.
Insert tree in pail.
Fill pail with play sand and then add water.
As the water level rises, position tree upright, shaking to settle sand.
Solid as a rock.
December 16th, 2008 at 1:32 pm
They are going to *bailout* Madoff’s clients. You just watch.
They’ll be touted as *pension funds*, *endowments*, and *charities*.
December 16th, 2008 at 3:02 pm
jckgas @ 10:16 am
…nailed it. The sheer audacity and brilliance of the scheme sends the mind reeling.