Anyone here a Hedge fund fan?

[mickeyd]

http://tinyurl.com/mcfw8
You can’t have escaped hearing about hedge funds. Wall Street is gearing up to provide registered product and fund of funds to the middle class investor. To hear the marketers tell it, they are the next big thing. The story sounds wonderful. All you have to do is suspend disbelief. Like Alice, you must simply believe six impossible things.

"Alice laughed, 'There's no use trying,' she said, 'one can't believe impossible things.' 'I daresay you haven't had much practice," said the Queen. 'When I was younger, I always did it for half an hour a day. Why, sometimes I've believed as many as six impossible things before breakfast.' "*

There are serious questions of custody, transparency, risk control, disclosure and registration in almost every hedge fund. Let’s forget all that for a moment. That leaves us with one remaining nagging problem. But, it’s a Whopper: Where’s the beef?

I admit that I have made little effort to educate myself about hedge funds, much less, invest a portion of my hard-earned stash in one of them. I guess I'm waiting to read something inspiring about these funds and maybe understand how they can fit into my AA. So far I have not been motivated.

Has anyone on this board invested in hedge a fund(s)? If so, what motivated you? Has it been a successful venture?

 

[mikew]

I invested in one before I took charge of my investments. The reason was my hope smarter people than I could do financial magic with my money. It was a fund of funds. It was a lot of difficult strategies with no explanation. There were also high undisclosed layered fees. The manager takes a percentage of the profits. I think 20%. I didn’t hold it for long so I don’t know how it would perform in different market conditions but it has averaged 10% return over the past couple of years. The NY Times ran a couple of interesting articles last year saying that the explosion of hedge funds was making the low hanging fruit disappear along with fat margins. Although nothing really bad happened, I probably won't be involved with this type of thing again.

 

[brewer12345]

Unless you find a truly superior manager, there is no way you will overcome the extremely fat fees in a fund-of-funds. It is unlikely that the truly superior managers will have anything to do with the stuff offered to retail investors.

 

[ERD50]

I'd like to see a hedge fund offer the following:

Annual return equal to the S&P or the 10 year Treasuries, whichever is greater for the year.

They can keep anything they can make above that.

Of course, they'd need to prove they have the cash on hand to cover a double digit loss in the S&P, and pay me my Treasury Yield. But I'd be glad to give them any excess they earn.

I don't think they could do it. Weren't there some funds a while back that did something like this? They would 'guarantee' S&P returns (minus dividends) and no loss of principle? DId they all go out of business by 2003?

-ERD50

 

[PsyopRanger]

I'd like to see a hedge fund offer the following:

Annual return equal to the S&P or the 10 year Treasuries, whichever is greater for the year.

They can keep anything they can make above that.

Of course, they'd need to prove they have the cash on hand to cover a double digit loss in the S&P, and pay me my Treasury Yield. But I'd be glad to give them any excess they earn.

I don't think they could do it. Weren't there some funds a while back that did something like this? They would 'guarantee' S&P returns (minus dividends) and no loss of principle? DId they all go out of business by 2003?

-ERD50

Dunn Capital Management

Overview of Key Characteristics

Performance: Program compound rates of return range from 14%-16% per annum, after all fees & expenses.

Longevity: Established October 1974. 31 years and counting, 20.43% CARR.

Non-Correlation: Zero correlation with traditional asset classes.

Fees: A fee structure fully aligned with the client's interests.

Incentive Only: No management fees
Past losses must be recouped before new fees accrue
DUNN, therefore, profits only when the investor profits

Technique: 100% quantitative trading of financial futures markets.

 

[brewer12345]

Hey, ranger, if you like that one, I can get you a great deal on a famous bridge. Landmark property in good shape!

 

[PsyopRanger]

Hey, ranger, if you like that one, I can get you a great deal on a famous bridge. Landmark property in good shape!

Aren’t Hedge Funds supposed to be risky and optimistic? Isn't that why they are accredited investments?

I suppose George Soros and his Quantum Fund are another scam?



"Don't be a cynic and disconsolate preacher. Don't bewail and moan. Omit the negative propositions. Challenge us with incessant affirmatives."

- Ralph Waldo Emerson

"A cynic is not merely one who reads bitter lessons from the past; he is the one who is prematurely disappointed in the future."

- Sydney J. Harris

 

[brewer12345]

The problem with hedge funds is a lack of transparency and heavy fees, often compounded by their inclusion in funds of funds and other distribution platforms that add another layer of (heavy) fees. Is the Dunn vehicle you threw out there any good? I've no idea. But it takes a lot of specialized expertise to separate the sheep from the goats, and even the experts screw up big time occasionally. Based on your posts thus far, I am pretty sure you are not well versed in selecting hedge funds. Then again, most retail investors are not.

 

[PsyopRanger]

I am not saying that hedge funds are a good investment vehicle, that’s the investors decision and I agree with you that their fees are outrageous.

I was responding to ERD50 who asked for a fund that met or beat the S&P 500 and was performance based.

Nothing more, nothing less.

Based on your posts thus far, I am pretty sure you are not well versed in selecting hedge funds.

I can see by your “encouragement” that you’re a positive role model for younger investors.

 

[brewer12345]

I am not saying that hedge funds are a good investment vehicle, that’s the investors decision and I agree with you that their fees are outrageous.

I was responding to ERD50 who asked for a fund that met or beat the S&P 500 and was performance based. 

Nothing more, nothing less.

And my response was meant to indicate that you cannot tell whether this fund did in fact beat the S&P 500, especially on a risk-adjusted basis, puerely on the basis of what you posted. Hedge funds are not as transparent as mutual funds and do not have many of the investor safeguards we often take for granted. Sometimes this is a good thing for investors, sometimes it is not a good thing. It is not all that simple to tell which category a particular fund falls into.

BTW, I am happy to encourage people, but not if they are heading full speed towards rocky shoals.

 

[PsyopRanger]

You will disagree with whatever I post as it does not fit your definition of “risk” and if it does not fit your definition, it is not fit for anyone else’s risk tolerance. Rigid thinking IMHO.

I was going to post a rebuttal but it seems futile, I have learned a lot in the week I have been on these boards, some people are too closed minded to see alternative points of view.

If you asked someone 600 years ago if the earth was flat, they would say yes anything else was seen as heresy.

I glad Columbus, Buffet, Gates, Carnegie, Ford, Rockefeller and countless others didn’t listen to the voice of reason

 

[brewer12345]

Dunno about the others, but one might argue that Buffett did, in fact, do a good job of listening to reason. The hard part is hearing "reason" while everyone around you is shouting "Buy!" or "Sell!" at the top of their lungs. MAybe that's why he likes it out there in (shudder) Omaha.

Seriously, I'm not trying to be the hall monitor. If you have a great idea on an alternative/off the beaten path investment I am all ears. But expect a fair amount of scrutiny on my part, since I like shooting fish in a barrel a lot better than being swallowed by a whale. No fun to lose capital because you didn't or couldn't fully understand the risks you were taking.

 

[PsyopRanger]

Point taken, thanks Brewer 8)

 

[setab]

I didn't realize that Buffet and Gates thought the world was flat. Don't let that out or stocks will drop, bonds will fall and calamity will abound.

setab

 

[ERD50]

I was responding to ERD50 who asked for a fund that met or beat the S&P 500 and was performance based.

Thanks, but that is not exactly what I defined. I'm not looking for performance beyond the S&P, I'm looking for a guarantee of NO losses (always provide at least treasury returns) AND performance of the S&P in up years. But they could take ALL the gains above the S&P for their fees.

I don't expect anyone to offer that. But, if there are managers that are supposedly so smart to be able to make money in both up and down markets, they *should* be able to offer this. They would make a ton of money if they made 20% and the S&P only did 10% that year - they could take 10% of my money as their fee, and I'd be happy. But, if the market is down, I want treasury rates. I'm not holding my breath.

ERD50

 

[unclemick]

Wall Street did have a product along those lines - but for the life of me I can't remember the name of it - Steve Sigurrude(spelling?) in a flyer touting his newsletter mentioned it.

Fairly complex - can't remember their technigue - puts and calls, options, or something. Offered a guaranteed floor/return.

Maybe someone posting here remembers them.

heh heh heh

 

[brewer12345]

Wall Street did have a product along those lines - but for the life of me I can't remember the name of it - Steve Sigurrude(spelling?) in a flyer touting his newsletter mentioned it.

Fairly complex - can't remember their technigue - puts and calls, options, or something. Offered a guaranteed floor/return.

Maybe someone posting here remembers them.

heh heh heh

Equity indexed annuity offers something like this. Offers a minimum return (less than treasuries) in down years and some participation in the indexes in up years (but significantly less than full participation, and it is capped). For this you pay large implied fees and generally have to agree to a fat surrender charge wich can take as long as 15 years (!) to fall off. These are typically the highest commission products that an annuity salesman can pitch. Guess what annuity product's sales have been shooting up lately?

 

[justin]

Equity indexed annuity offers something like this. Offers a minimum return (less than treasuries) in down years and some participation in the indexes in up years (but significantly less than full participation, and it is capped). For this you pay large implied fees and generally have to agree to a fat surrender charge wich can take as long as 15 years (!) to fall off. These are typically the highest commission products that an annuity salesman can pitch. Guess what annuity product's sales have been shooting up lately?

It's been years, but I think my state's (north carolina) 529 plan had one of these deals. You would get 70% of the return of the SP500 when it was above the yield of 2 year treasuries, otherwise you get 2 year treasuries. No idea about fees - not sure if the return you get is before or after fees.

 

[brewer12345]

It's been years, but I think my state's (north carolina) 529 plan had one of these deals.  You would get 70% of the return of the SP500 when it was above the yield of 2 year treasuries, otherwise you get 2 year treasuries.  No idea about fees - not sure if the return you get is before or after fees.

At least in the equity-indexed annuities, the fees are implicit, rather than explicit. SPecifically, the package of bonds and equity derivatives the insurance company sells you is worth significantly less than what they cost on the open market. Basically, they sell you 80 cents for a dollar and split the difference with the agent.

It would not surprise me in the least if the 529 plan was selling 85 cents for a dollar.

 

[bongo2]

Wall Street did have a product along those lines - but for the life of me I can't remember the name of it

I think you're thinking of MITTS (symbol MITT is one). They were $10/share at issue and you were promised back $10 or the appreciation of some index after X years, which ever was greater. There are various of these on different indexes with different "strikes" and maturities. It's not quite what ERD50 wanted, which is understandable since that would be impossible (why would anyone offer the returns to outside investors if they could guarantee to beat their borrowing costs).

I've worked with some hedge funds, and one big benefit that they have is the ability to invest in things that average investors can't (private equity, catastrophe risk, life settlements, private debt, etc). This is a legitimate way that hedge funds can do better because those investments have to offer better returns in order to attract money. On the other hand there is a lot of hedge fund money out there these days chasing these opportunities, and it is not clear that they will be able to beat their enormous fees. Hedge funds are also able to leverage themselves to ridiculous extents in order to exploit perceived mispricings / arbitrage opportunities / special situations, but I am a lot less convinced that this is a benefit.

 

[Cransten]

Hedge funds are a no-lose proposition -- for the hedge fund managers.  They make outrageous fees when their bets win, and lose nothing when they lose.  Can they pay off?  Sure, just like a race-track tout can give you a winner.  It's just not the way to bet it.

Access to hedge funds used to be restricted to monied folk, but now that the sheeple have access to them you're going to hear lots of bleating when the inevitable shearing occurs. 

 

[brewer12345]

and lose nothing when they lose. 

Actually, not so much. If a hedge fund has a losing year, or sometimes even a losing couple of quarters, that is usually the end of the fund. The manager loses their business, and since they usually have a lot of their own capital invested in the fund, they usually also get hurt if the fund blows up.