Posts filed under “Hedge Funds”

Hedge Fund Due Diligence

There are some people worthy of blind trust with your money. They are the ones who: 1) seem to make money over time; 2) have well-audited books, which prove indeed they have; and 3) seem to have a cogent plan to continue making money in the future. All three must be satisfied and everything else is unimportant.

I’ve been railing against the “hedge fund industry” for as long as I’ve run hedge funds (1996). In spite of great promotion over the past ten years that the hedge fund industry is an asset class – like stocks, bonds or real estate – hedge funds (yours and mine) are still only private investment pools of money that speculate in the capital markets. The hedge fund industry should not be an industry and it seems, finally, that it is headed back to the cottage business it once was. Hedge funds are being right sized so that the ones remaining – the ones that keep offices down the hall from an accountant or dentist – are managed by individuals with a knack or a view, and who know they are speculating. Their investors are likely to know that too, and they will invest less in each fund. The scale of the “industry” will shrink. Hallelujah.

This does not imply that policymakers and regulators won’t heed wayward calls to “improve the system”. They are likely to confuse some issues though. First, private investment partnerships can’t be regulated merely because they are private investment partnerships. There is no legal difference between a partnership that invests in movies, multi-family rehabs in The Bronx, senior secured bank loans or large-cap stocks, and so there can be no law that forces a private investment partnership to register with any authority unless all such partnerships are to be regulated by that authority. So, if all “hedge funds” are to be regulated, it must be because they invest alongside the public in the capital markets and are subject to the same scrutiny as everyone else in those markets – no more, no less. Since private pools of capital investing in public markets are already regulated in the same way as every other investor in public capital markets, it seems obvious that there can be no new regulation enacted to stop “hedge funds” from being “hedge funds”.

Second, investors in unregistered hedge funds that lose their money know in advance that they have no regulatory protections. So, unless an investor accuses his hedge fund manager of fraud or of not abiding by the terms of their private agreement, there is nothing to be adjudicated. Regulators can do nothing to change this. CNBC is beating up on a straw man to produce public outrage for ratings. There is no public damage in the Bernie Madoff case, as there was with Bernie Ebbers, et al.

Barry, I know you agree that anyone should be allowed to privately syndicate a pool of investors and speculate with their money using any mix of investments or strategies upon which they and their charges agree. If investors in a private fund want a good audit every year, month or day, great. If they couldn’t care less, great. If they want to leverage their portfolios 80 times and their lenders and investors don’t mind, great. If they want to sue their hedge fund manager for not abiding by their agreement, great.

“Hedge funds” might hedge or they might be pools of capital that speculate using their best efforts (QB Partners is the latter). The only document that accurately portrays an investment program and the merits and risks involved in a fund is the official offering document. They all say (or at least they should say) that investors can lose all of their money and that the investment management company can do anything it wants with investor money.

Of course, nothing is guaranteed – corrupt managers can hide great losses or gains at any point in time and can perpetuate them over time with the help of a shoddy auditor. Investors shouldn’t think for a moment that vigilance or rigid risk controls can overcome fraud. The only thing vigilance may accomplish is spotting fraud earlier than fellow fund investors, which might allow the vigilant to get his money back before everyone else catches on.

WHEN YOU INVEST YOUR MONEY IN A PUBLIC OR PRIVATE POOL OF INVESTMENT CAPITAL – REGARDLESS OF WHETHER IT IS A LIGHTLY REGUALTED “HEDGE FUND” OR A HEAVILY REGULATED MUTUAL OR MONEY-MARKET FUND – YOU ARE SPECULATING (NOT SAVING) ON TWO LEVELS: 1. MARKETS (BETA) AND 2. THE CONDUIT (ALPHA).

If investors don’t have the acumen to judge whether a fund and its manager should be trusted, they should look at the fund’s audit and only then diversify their fund investments.

Paul Brodsky
QB Partners

QB Asset Management Co.
(917) 538 – 1908
pbrodsky -at- qbamco.com

Category: BP Cafe, Hedge Funds, Investing

SEC Ignored Detailed 2005 Complaint re: Madoff

What follows is the Harry Markopolos complaint to the SEC, circa November 2005, identifying 29 red flags that Madoff was a fraud. This highly detailed complaint was filed regarding the apparent Fraud at Madoff Securities. It was ignored by the Christopher Cox SEC, which was too busy concocting schemes to dismantle the SEC rather than…Read More

Category: Hedge Funds, Legal, Regulation

Hedge Fund Partners vs Managed Account Investors

Today’s NYT (and Monday’s WSJ) each have articles which compare Madoff investors with those of recent $400 million dollar hedge fund fraud Bayou Group. I believe this misunderstands the applicable law of partnership, fraud, and investing. Hedge fund investors are limited partners, and as such, they have a fiduciary duty to their other partners. Regardless…Read More

Category: Hedge Funds, Legal, Regulation

Vast Under-Investment in Due Diligence

With everyone tsk-tsking the Madoff scandal — the amount lost, the after-the-fact obviousness, the SEC incompetence — I thought now was as  good a time as any to look at the actual research, due diligence and manpower thrown at investigating managers and funds. Not surprisingly, it is tiny — at least, when compared with the…Read More

Category: Bailouts, Hedge Funds, Investing, Legal, Regulation

Why Do Fund of Funds Exist

Here’s a question for you: What is the actual purpose of FoF ? In theory, they are supposed to do the due diligence, the forensic accounting, the deep background checks that ordinary investors cannot. Then once they identify a group of funds they want to allocate capital too, they are supposed to run the asset…Read More

Category: Bailouts, Hedge Funds, Investing, Legal

Be Wary of Serial Correlation

MIT’s Andrew Lo: The key concept here, developed by MIT professor and noted hedge-fund theorist Andrew Lo, is “serial correlation.” Simply put, serial correlation is the degree to which each month’s returns in a fund mirror the results of the month before. A fund that returns the exact same amount every month is perfectly serially…Read More

Category: Hedge Funds, Legal, Markets, Mathematics, Quantitative

Harvard: Not So Smart After All

We interrupt the GM hearings for this brief moment of schadenfreude: Harvard’s endowment has now blown through over $8 Billion, or 22% in the last four months. Correct me if I am wrong, but wasn’t Harvard’s endowment outperforming the broad indices for a long time? And didn’t their Board of Trustees fire/replace/chase awayt hese outperforming…Read More

Category: Hedge Funds, Markets, Really, really bad calls

MODELS & THE RISK OF RUIN

Bill Werner is an Engineer in Missouri City, Texas. The following is his review of this year’s “worst call” and an attempt at drilling down to the ultimate problem. ~~~ > “You will see when you can swallow the world in one gulp.” -Zen Aphorism > My submittal for the worst call is that “housing markets…Read More

Category: Bailouts, BP Cafe, Hedge Funds

Hedge Fund Performance by Strategy

With 6 hedge fund managers — Philip Falcone, Kenneth Griffin, John Paulson, James Simons and George Soros — testifying before the House Committee on Oversight and Government Reform today, it might be a good time to look at how various strategies have been performing. What hedge fund strategy has yielded the best relative performance? Not…Read More

Category: Hedge Funds, Markets, Politics, Trading

Charlie Rose: A conversation with Bill Ackman

A conversation with Bill Ackman, major investor and hedge fund manager of Pershing Square Capital Management LP.

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Source:
A conversation with Bill Ackman
Charlie Rose, Tuesday, November 11, 2008

http://www.charlierose.com/view/interview/9498

Category: Derivatives, Hedge Funds, Markets, Video