Posts filed under “Hedge Funds”

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 heavy lifting of equity research. The asset management and brokerage industry is vastly under-invested in due diligence; the resources applied to hedge funds and managers is a comparative pittance.

Note that every major brokerage firm — from Merrill Lynch to UBS to Morgan Stanley to Credit Suisse and beyond — offer a platform to these managers. Their managed assets group, private wealth management, (even retail brokerage) have access to these funds and managers.

And the due diligence that’s performed? It would be generous to call it weak. I was vetted a few years ago, and the items I was prepared to answer questions about — an IRS stock option issue (now resolved), a bankruptcy (someone with a similar name, not me), a few dumb items on my credit score — never came up. I was stunned how superficial the process was.

There have been more mutual funds than equities for a long time. A variety of firms, most notably, Morningstar, devote lots of resources and manpower to analyzing these funds. There are now more hedge fund managers than there are US stocks. Throw in the biggest of the individual managed account firms (like Madoff’s) and its significantly bigger.

Yet the research, resources and manpower dedicated to investigating the managers and hedge funds is a pittance of what’s applied towards researching just the S&P500 equities.

Consider these data points: The typical big firm covers at least half of the S&P500 equities. Usually, there are 3 separate divisions that do so: Asset Management, Investment Banking, and Institutional Trading. Due to compliance rules (Chinese Walls, Spitzer rules, etc.) each does a very different form of research. The research can be long-term investing/asset management focused, or it could be geared towards iBanking, or it might simply be institutional trading. This often means some bigger firms have more than one analyst covering the same individual stock.

One firm I am familiar with — let’s use a range to avoid identifying them specifically — has this headcount:

  1. Wealth Management Research: 50-75
  2. Investment Banking Research: 300-400
  3. Institutional Trading: 150-200

Let’s assume half of these people are analysts, and the rest are admin/marketing/sales.

How many people do you think they have vetting the 250-500 hedge fund and individual managers on their platform?

Under 10.

I surmise this ratio — somewhere near 25 to 1 — is typical throughout the industry.

If you want to know why a sociopath like Madoff slipped through the cracks — as an industry, we do not dedicate enough resources to vetting managers.

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UPDATE JANUARY 8 2009 1:21PM

Credit Suisse Urged Clients to Dump Madoff Funds IN 2000
Credit Suisse Group AG, whose clients lost almost $1 billion in Bernard Madoff’s alleged swindle, urged customers more than eight years ago to withdraw cash from his firm because the bank couldn’t determine how he made money, said three people familiar with the matter.

Oswald Gruebel, who headed the private-banking unit of Switzerland’s No. 2 lender at the time, made the recommendation after meeting Madoff in New York in June 2000, the people said, speaking anonymously because the details were private. Credit Suisse customers proceeded to redeem about $250 million from Madoff-run funds, half the total held by the bank’s clients, the people said.

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

When Genius Failed

A financial firm borrows billions of dollars to make big bets on esoteric securities. Markets turn and the bets go sour. Overnight, the firm loses most of its money, and Wall Street suddenly shuns it. Fearing that its collapse could set off a full-scale market meltdown, the government intervenes and encourages private interests to bail…Read More

Category: Bailouts, Books, Derivatives, Hedge Funds, Markets

Andrew Lahde: Goodbye!

Now, this is how you close a fund!

Andrew Lahde, manager of a small California hedge fund, Lahde Capital, burst into the spotlight last year after his one-year-old fund returned 866% betting on the subprime collapse. Last month, he took his ball and went home. Tired of the stress, he closed the fund.

Today, Lahde passed along his "goodbye" letter (via FT Alphaville and Portfolio.com), a snarky "Up Yours" to those who do deserve it.

Enjoy:

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Category: Hedge Funds, Psychology

New Hedge Fund: Strategery Capital

Category: Hedge Funds, Politics, Taxes and Policy