HedgeSpeak

Fund of Fund-Speak

2010-06-10T10:05:00.001-04:00

"Yes, I’m a buyer, but I am a parasite on other people’s genius"

David Smith, GAM

One of my favorite quotes that best describes the Hedge Fund of Fund industry.

More Footnote-Speak

2010-05-28T12:16:00.003-04:00

March 31st 2010

“(1) 1. ...Performance data pertaining to periods after 12/31/06 relates to investors that are charged a 2% management fee and a 20% performance fee. Performance data pertaining to periods prior 12/31/06 relates to investors that are charged a 1.5% management fee and a 20% performance fee Fees applicable to certain investors may be different."

It is always worth the time to peruse the footnotes which is why I am posting another footnote comment.

Clearly the relevant fund manager increased their management fees when business was booming (consistent with the rest of the industry), but I remain curious how long before we see reversion to pre-2006 fee levels.

Anyone? Separately, in case you were wondering... the typo is from the managers letter.

Footnote-Speak Mr. Mauldin?

2010-05-20T10:46:00.004-04:00

May 18th, 2010

"...I will focus on another issue close to my heart – commodities.

In last month's Absolute Return Letter I raised a yellow flag concerning the short term outlook for commodities[1]."

"Footnotes:[1] There is no denying that the long term outlook for commodities continues to be bullish, mainly driven by the strong growth in emerging market economies."

Source John Mauldin JohnMauldin@InvestorsInsight.com

For those that have received Mr. Mauldins recent (relevant) letter discussing a a yellow flag relating to Commodities, I urge everyone to absorb its contents and possible importance. He is often 6 to 12 months premature, but he has clearly flushed out (no pun intended) issues relating to the evolution of commodities within our modern financial markets. Buyers beware.

That said, his careful phrasing and protective footnote illustrate how investors may choose to carefully read all documents from start to end.

FedSpeak

2010-04-19T18:17:00.002-04:00

April 2010

"I Saw the Crisis Coming. Why Didn’t the Fed?

By MICHAEL J. BURRY
Cupertino, Calif.

ALAN GREENSPAN, the former chairman of the Federal Reserve, proclaimed last month that no one could have predicted the housing bubble. "Everybody missed it," he said, "academia, the Federal Reserve, all regulators."

But that is not how I remember it. Back in 2005 and 2006, I argued as forcefully as I could, in letters to clients of my investment firm, Scion Capital, that the mortgage market would melt down in the second half of 2007, causing substantial damage to the economy. My prediction was based on my research into the residential mortgage market and mortgage-backed securities."

This appeared as an Op Ed in the New York Times earlier this month and the author calls out former Fed Chairman Greenspan for being asleep at the wheel. He along with several other hedge fund firms (and broker dealers) were actively informing the world of their "contrarian" views. One of these views even emanating from one of Deutsche Banks own traders who was ridiculed with the nickname "chicken little (as in the sky is falling)."

As an investor, one should be listening to the herd (as in sheep), but more importantly, pay constant attention to the "nay sayers" in order to better understand the risk of what could go wrong. It is odd that Mr. Greenspan did not have an entourage that employed similar strategies.

Has anyone asked whether there have been changes to the process within the Fed?

Mr. Soros speaks Greek

2010-02-22T10:56:00.003-05:00

February 21st 2010

"The situation is aggravated by the market in credit default swaps, which is biased in favour of those who speculate on failure. Being long CDS, the risk automatically declines if they are wrong. This is the opposite of selling short stocks, where being wrong the risk automatically increases. Speculation in CDS may drive the risk premium higher."

"So makeshift assistance should be enough for Greece, but that leaves Spain, Italy, Portugal and Ireland. Together they constitute too large a portion of euroland to be helped in this way. The survival of Greece would still leave the future of the euro in question. Even if it handles the current crisis, what about the next one?"

Channeling an old TV commercial:"When Soros speaks, people listen."

Most managers have been positioned on the PIIGS for the past 2 years and simply waiting for events to unfold. Was Europe not listening?

Enemy of the State?

2010-02-16T17:24:00.003-05:00

August 2009

"Nevertheless it features one of the most formidable new buildings that I have ever come across. I would estimate the build cost must be in the hundreds of millions of dollars. And it wasn't located in Hong Kong or even Shanghai or Shenzhen, but in the decidedly less glamorous Wuhan in the centre of the country. And to make matters worse it was completely empty..."

"I learned recently that the building now has a tenant, the $20bn Minsheng Bank, but I suspect they lent the money to the developer in the first place."

"Adding to the intrigue, I have subsequently been informed that our video has now been blocked in China by the authorities. Who would have thought that I would become an enemy of the state?"

We read regularly in the media about how hedge fund managers are the bad guys always looking to make a profit. I would argue that in most cases these same managers are simply correcting (exploiting) certain market inefficiencies or simply going against the herd. Examples would include Mr. Chanos and Enron and this manager asking some basic questions.

The real question should be to ask other managers why they are not asking similar questions?

It's Greek to me...

2010-02-13T15:32:00.000-05:00

Feb. 12th 2010

"Path dependence explains how the set of decisions one faces for any given circumstance is limited by the decisions one has made in the past, even though past circumstances may no longer be relevant. In essence, history matters."

"With regard to the future, the choices we make determine the paths we will take."

"As I have been writing for a long time, we have made a series of bad choices, often the easy choices, all over the developed world. We are now entering an era in which our choices are being limited by the nature of the markets. Not only are we in a path-dependent world, but the number of paths from which we may choose are becoming fewer with each passing year."

John Mauldin's most recent note manages to reduce all the noise into a simple hum. He discusses the mess in Europe. His next conference is April 22-24 in La Jolla CA

ShortSpeak

2010-01-15T16:25:00.003-05:00

Dec 2009

"On the short side, opportunities remain scarce, and we are not surprised by this. Clearly the abnormality of returns in 2007/2008 from our short positions were such that capital deployed in here is unlikely to be productive for some time.

The nature of the corporate reaction to the downturn amplifies this point. Generally a good short position stems from an over optimistic investment decision by corporate management.

The combination of limited finance and corporate prudence of the last couple of years has inevitably meant that examples of this are few and far between."

I would love to simply insert the entire letter. The manager produced 30 pages of detailed review of his past predictions with half dedicated to his outlook for the future.

His entire letter is filled with similar quotes which explain realities in the simplest of terms.

It is all too rare to find a hedge fund manager willing to take the time to explain and share his thoughts.

Well done and an example for others to follow.

2010-01-13T10:16:00.002-05:00

Excerpt from HedgeSpeak:

I saw the green light flicker on my phone and answered. A quiet voice with a German accent stated: “I voot like to speak vit “Bob Picard.” He immediately took on a menacing voice saying that he had heard that I was bad mouthing his hedge fund and that he had no choice but to personally sue me, my firm, and my family. He added that he would make sure that "my team would not work on Wall Street again." He then hung up the phone. As the line went dead, I started immediately thinking about my on site due diligence visits and what information I may have shared with anyone. All this was done in seconds and immediately turned to my “desk counsel” who was never more than 3 feet away at any given time of day.

“Kev, we have a problem. I was just personally threatened by Michael Berger, one of those managers who did not make it through our screening.”

Too often we forget that Wall Street and its Hedge Fund industry is about people and trust. In the hedge fund world, reputation and trust are seeded, grown and nurtured for years at a time

Let’s back up 6 months. The Fund was called Manhattan Capital, managed by an Austrian national named Michael Berger. The fund was brought to our attention from investors who claimed that Manhattan Capital Management was the ultimate Long Short equity hedge fund. It would make money during market rallies and would protect capital and make even more money in down markets. His track record included returns over 30% per annum regardless of the year and the market direction.

We met in beautiful offices in mid town. Surprisingly, he did not bring us to a conference room, but sat us down in an area off the reception area adorned with couches.

Michael was a low talker quietly smoking a cigarette throughout the meeting...

Around the World...

2010-01-06T16:20:00.004-05:00

November 26, 2009

"We’ve spent two weeks traveling almost 20,000 miles and visiting three cities: Tokyo, Hanoi & Singapore. Meetings included quality time spent with central bankers, investors, pension fund managers, academics, commercial bankers, and others. It has been a whirlwind and well worth the fatigue.

We will summarize the observations with some key points.

Our trip confirms that the Asian emerging-market story is real and is likely to accelerate..."

It is all too rare that managers actually travel the world in order to get first hand knowledge. It is also rare for managers to get access to the right people. It is all too often that managers accept second hand information as gospel. Clearly in today's central bank (IE Government) driven economy, managers recognize the potential impact of government intervention as it relates to company fundamentals.

You need to ask your manager: "Where have you been lately and who did you talk to?"

Wall StreetSpeak

2009-10-20T10:38:00.002-04:00

Again, a letter that no investor wants to receive:

October 19th 2009

Dear XYZ Employees, Clients and Friends:

During this challenging time, I wanted to take a moment to address you directly. As I am sure you understand, I am not able to respond in detail to the charges recently brought against me. But let me be clear: they are, without exception, entirely baseless. I am innocent and will vigorously defend myself and our firm.

As I move forward on my defense, I want to assure you that our commitment to our investors and employees will remain unwavering. I will continue to be here working for XYZ, and the firm will continue to serve its clients with effectiveness and integrity. Thank you for your ongoing support.

This letter is of course sent out after wide press coverage in the WSJ. Most likely, it has been reviewed by attorneys and PR firms. The question that most investors are now asking is who is next? Who in their portfolio may also be under investigation? The institutional allocators need to revise their investment processes to screen out the potential reputational risk associated with an investment with an alleged "cheater."

On the other side, how many hedge fund firms called a Monday morning meeting to discuss potential impact and isolate any potential issues in their own firms. Lastly, how many shorted names in the portfolio of the alleged "crooked manager" who will be hit by redemption's.

For $1,000: What is suspend redemption's?

RegulationSpeak.... Forty Years Ago!

2009-09-15T14:30:00.005-04:00

Fortune Magazine 1969

"Probably the hedge funds deserve to be regulated in some way, but whether they should be ravaged is another question. If wealthy, sophisticated investors wish to pay 20 percent of their profits for investment management or, as one dejected investor put it, are "foolish" enough to pay 20 percent-then quite possibly they should be allowed to do so. Anyway...after 1969, not so many will be in that magnanimous a mood. For as every hedge-fund manager knows, without a good product at a good price, you don't get far in the market."

Just when you think there is something unique about your "epoch" you realize that the same issues and problems have existed for years. It helps to have historical persepctive which can only be gained through: "Experience"

How many investors today were allocating to hedge funds in 1969? 1979? 1989?

More relevant, the debate continues on regulation 40 years later...

Side Pockets anyone?

2009-09-11T08:58:00.002-04:00

December 2005

These adjustments are designed to provide additional comfort to investors. First, we are committing that no side pocket investment will have a duration of greater than 10 years.

For those that were surprised by side pockets (in 2007 and 2008), I would simply suggest they look back over the past 10 years. Anytime a manager is confronted with large redemptions in a "long term" investment strategy (i.e. credit, private equity, real estate), they will either suspend redemptions, side pocket or distribute securities in kind.

Unfortunately, many allocators preferred to simply ignore this possibility (risk) as "improbable."

10 Years ago...

2009-09-03T09:48:00.003-04:00

January 6, 1999

“Be that as it may, we are not paid to pass judgement on Fed policy. That is best to think tanks. Nor are we in the business of market timing. While we do have certain macro-economic views, we are primarily in the business of managing a portfolio of individual investments. In so doing we lost you a meaningful amount of money last quarter.”

“Essentially, having what appeared to be a number of separate moderate bets, our portfolio was really exposed to one growing bet on the internet.”

It may be time for investors to watch carefully where their investment managers are drifting in order to generate competitive returns. As the "herd" mentality develops managers often find themselves allocating ever more money to (temporary) winning trades and forgetting about the patience required to manage a diversified long term portfolio.

It begs the question: "Have investors become more patient after the recent correction or will they return to short term rewards."

Lastly (and I'm just throwing it out there), is the aging demographics for the US and Japan actually encouraging more short term risk since older investors do not have the time for a long term view...

HedgeSpeak: I give up... really?

2009-08-11T12:37:00.004-04:00

August 2009

"My decision is solely a personal one. After fifteen years of being singularly focused on building and managing XYZ Fund, I believe it is time to reassess my future. I intend to spend more time with my family, pursue my philanthropic interests and establish a family office to manage my own capital and charitable foundation."

This decision to return over USD 3 Billion to investors represents another large firm choosing to liquidate Vs. deal with the ever changing landscape in hedge fund land. Simple questions should come to mind relating to rationale and timing...

Thoughts anyone?

Consolidation? Anyone? Anyone?

2009-08-05T07:39:00.003-04:00

"We are very pleased to announce that on July 9, 2009, XYZ Associates and 123 Management entered in to an agreement under which 123 Management will take over the investment management duties....

"...We believe that this combination will greatly bolster our capabilities as we will be able to perform some functions in house, such as Operational Due Diligence, which were previously run through an outsourced service provider."

A positive sign within the industry that demonstrates certain benefits of hedge fund (in this case fund of funds) consolidation. The seller recognizes the need to provide additional services to investors in order to remain competitive and hold on to investors/assets.

There remains a large amount of smaller (and mid size) firms that have outsourced compliance, legal, technology, marketing and even trading execution in order to save costs and infrastructure.

Clearly, the above example of consolidation and rationalization will be beneficial and help the industry emerge stronger.

HedgeSpeak: What is he talking about!?

2009-08-03T18:13:00.004-04:00

February 2000

“…..Years ending in “O” have an average loss of -8.17%; the Dow gains only an average of only 0.85% during the last year of a second term President and loses an average of -7.0% for the last year of a second term Democrat; and the results from XYZ Study forecast prices going down -9.3%. Since the release of that letter, the Dow’s performance has provided further evidence that Dow prices may continue to deteriorate.”

I recall my colleague Patrick throwing up his arms and saying: "What is he talking about!?"

This manager spent significant time analyzing the more obscure aspects of technical market analysis in order to gain an investment edge.

Apparently there was no edge. By the end of 2000, his business was shuttered.

Conventional wisdom is that if it doesn't make sense... Do not invest.

RealSpeak

2009-07-26T22:06:00.002-04:00

July 2009

"We are now in the early stages of a depression..."

"...the only thing propping up this market is investor sentiment. Earning have not improved. Keep it simple, stupid-investing is and has always been about the real economy, and this market is ignoring the hard data."

No hedgespeak here, only realspeak.

HedgeSpeak and Timing is Everything...

2009-07-21T11:24:00.003-04:00

July 8, 1998

“As opportunities in convertible hedging dried up, a synthetic put program was implemented. This proved too costly and has been terminated.”

Focus on the date. The all too common cycle of a manager becoming frustrated by the cost of maintaining his hedge, and the investors frustration and pressure to generate competitive returns. Are investors really using "apples to apples" comparisons? Are they simply comparing to another manager who is not hedging consistently.

The irony in this case, is that the manager chose to terminate his hedging program one month prior to Long Term Capital Managements failure and the subsequent large market drop.

Top Down, Bottom Up?

2009-07-14T15:08:00.002-04:00

June 2009

"The XYZ Fund (the 'Fund') seeks to achieve long term capital appreciation utilising a top down active asset allocation policy ...

...Stock selection provides the core to the investment process."

I just noticed this basic strategy description in a recent monthly snapshot. You do not need to look far to pick up on basic inconsistencies.

If "Stock Selection" is the core of the investment process, shouldn't the marketing team state that they use a "bottom up" approach to investing? I know, I know... there is room for debate, but it does appear that some managers still engage in certain hedgespeak in order to cover all investor types. They try to be everything to everybody.

At least they didn't write "bottoms up."

Efficient Markets anyone?

2009-07-06T16:35:00.002-04:00

June 2009

“Unfortunately, there’s lack of consistence of what’s happening. I am wondering how stupid the market can be for how long.”

One difficulty confronting managers (and their investors) is maintaining conviction no matter how great the head winds or how inefficient the markets.

What separates one managers brilliance from another managers stubbornness?

I many cases, simply timing and their tolerance for risk.

HedgeSpeak: Fear of Melt Down or Melt-Up?

2009-07-02T09:29:00.003-04:00

May 2009

"Rather than fight the riptide we decided to go with it until it ebbed. We reduced a number of our short positions and covered our index shorts that had served us so well in the market meltdown, reducing our notional short exposure in the process. We also bought high yield indices to hedge out our remaining short exposure and to cover our portfolio for a further melt-up."

General consensus is that hedge funds make money in all market environments. It remains a naive statement with limited appreciation for the actual market realities and the difficulty to continuously manage short positions. Very few appreciate the maddening aspect for a hedge fund manager to maintain hedges throughout a rally. Managers will often second guess themselves, and in some cases be influenced by (frustrated) investors demanding performance on during rallies. Often, the manager will have doubt and reduce those hedges just as the market reverses and then lose the benefit of those same hedges.

The manager has to weigh the pros and cons: Do I hold steady? Do I shift? Is a Melt Up worse than a Melt Down?

Anyone? Anyone?

Climb every mountain...

2009-06-25T16:31:00.004-04:00

May 31st, 2000

“Within a month of the stroke, I had regained most of my motor skills and although still unable to speak properly, I was able to follow the markets and our trading program and to put in my two cents on occasion, for whatever it was worth.”

This is an actual quote from a manager letter back in 2000. This is not intended to poke fun, but simply to expose the "key man" risk with many hedge funds and the way they are managed.

It is remarkable that this manager, who suffered a tragic health set back was able to not only pen (dictate) this missive, but also take over ongoing management of the portfolio and actually return redeeming investors capital with an 80% net return for the year 2000.

This actually illustrates the courage and perseverance often present in great leaders.

No excuses. Just results. Anyone else worthy?

2009-06-23T18:13:00.002-04:00

June 2009

"I never anticipated the extent of the financial carnage that we have seen since the middle of 2007."

We all struggle with the "new financial paradigm" but shouldn't good investment managers anticipate all possible outcomes no matter how improbable?

Mr. Jones on Failure...

2009-06-19T22:41:00.001-04:00

Worth the read...
Paul Tudor Jones - Failure Speech June 2009

Stop to smell the roses...?

2009-06-19T08:53:00.005-04:00

July 1, 1999

“However, after 63 months of relentlessly running and gunning XYZ Fund, I shall stop to smell the roses. On July 11, I will be getting married and taking a month off. Mark will be handling the ship. I am reachable if needed. The portfolio probably will do better with me not there meddling and messing things up all day long.”

We are seeing several firms shut down for different reasons. A paradigm shift in the investment world? Difficulty to generate returns? Grumpy investors? Or simply less profitable relative to the stress involved with running an investment firm?

I recall a veteran long/short manager closing his fund in 2007, citing the impossibility to generate proper returns, and subsequently being lambasted by many for "quitting" when he was frustrated. Should shutting down be considered a failure or very prescient thinking?

With the recent fund closures and liquidations we are losing (temporarily) some very talented people. The flip side is this will lead to the emergence of a whole new generation of entrepreneurs who will most likely help define a new hedge fund industry 2.0

Prescient? Time will tell...

Straight Talk

2009-06-17T10:05:00.002-04:00

October 2008

"Although, in contrast to most hedge fund firms, we have yet to generate profits from our management fee - the investments we continue to make in the infrastructure and management talent of our firm have served the fund well."

It is important to distinguish the business from the investment side. As the industry has developed, it has become apparent that a good money manager does not necessarily translate into a good business manager. Today's hedge fund manager often started as a great money manager, then became a fund raiser and eventually a business manager with limited time left for managing money, his core discipline and original reason to launch a hedge fund.

The above quote actually illustrates the manager's decision to build out institutional quality systems and people in order to create franchise value. There is ongoing debate as to whether a higher management fee translates into a more "stable" organisation. As the industry consolidates, it will be interesting to determine which was the right model.

Were hedge funds the "new plastic?"

2009-06-12T14:39:00.002-04:00

The following was pulled from a (now defunct) multi-strategy hedge fund investor letter in 2004:

"William Safire characterized the mood and popularity of hedge funds well in a recent column when he said: In a future remake of ‘The Graduate,’ the phrase replacing ‘plastics’ to be whispered in the ear of the title role is ‘hedge funds.’”

"Given factors like these, I have reconsidered my opinion and questioned whether the current flow of funds into hedge funds is becoming excessive."

There has been ongoing debate for over 20 years on the potential "bubble" within hedge funds. Hedge Funds are simply active money managers with the most tools available to allocate capital. It is not the hedge funds per se, but the strategies that will, dependant on their liquidity, exhibit possible bubble tendencies.

Hedge funds were just one type of plastic, not to be mixed up with other types of plastic... like credit (cards, CDO's, CDS etc.).

What will be the new new Plastic, now that whispering the words "hedge funds" results in a frown? Anyone? Anyone?

Scotch anyone?

2009-06-11T18:11:00.003-04:00

“While we dodged some bullets, we could not get out of the way of the freight train.”

I was recently asked to speak to the future (soon to be unemployed hedge fund analyst) son-in-law of a family friend to give some thoughtful advice on the hedge fund industry. After sharing a scotch and staring into those young 30 something "deer in headlights" eyes, I immediately started going over past "hedgespeak" files and explained that, though this market may be worse than others, our industry has a regular cyclical downturn every 4 years. Just read the letters! The above was actually written back in September 1998. The more one reads the more one realizes that little changes except for the actors caught up in a similar cycle. He left a little wiser and a little more secure with the thought that the sky may ultimately not fall.

Investor Speak?

2009-06-09T15:46:00.002-04:00

One of my favorite quotes from a Fund of Funds manager describing his role within the alternative investment food chain:

"Yes, I’m a buyer, but I am a parasite on other’s people’s genius"

Term Speak...

2009-06-08T14:01:00.003-04:00

"This letter describes new terms of investment in all XYZ funds effective July 1, 2009. We have attempted to be responsive to changes in the industry and feedback from our investor base. We believe these improved terms strike the right balance between promoting capital stability and providing desired certainty of investor liquidity."

"In addition, we will abolish the manager’s ability to impose a gate at the fund level. However, the ability to suspend redemptions in extraordinary circumstances in order to serve the collective best interests of investors will be retained."

It is good to know that several managers are still listening to their investors and treating them as partners. One can only applaud the professional tone and assume the manager would be just as methodical when dealing with his portfolio of companies etc.

Hedge Fund Redemption 101 and Best Practices?

2009-06-04T09:27:00.006-04:00

Just received the latest fund closure notice:

June 2nd 2009:
"In order to ensure that all XYZ investors are treated equally, redemption requests have been suspended. Investors who have submitted second quarter redemption requests will instead participate in the overall return of capital. We anticipate that, in early July, investors will receive: (i) a cash payment representing approximately 75% of your current XYZ investment and (ii) an in kind distribution of a pro rata interest in the XYZ Private Portfolio(“XPP”) representing approximately 15% of your current XYZ investment."

Another sad day but is it really new to hedge fund investors? Just take a look back at the following note received almost 10 years ago from a different manager of similar size:

November 22, 2000

“Currently the fund’s portfolio is comprised of approximately 25% of private equities that are not liquid…. Any partner who has elected to redeem…. will receive their pro-rata share of each of the private securities in kind."

Once again, the industry has found a way to still fall into liquidity traps. The above funds were both straight forward "Long/Short Equity" managers with a mandate to invest in liquid stocks.

This is just an additional sign of the ongoing consolidation and/or liquidation that is expected within the hedge fund industry. It is worthwhile to consider that when managers suspend redemptions or invoke a gate, the interests of their investors and their own may no longer be aligned. There currently is no mechanism to realign those interests unless the manager brings in an independent party to insure best practices.

HedgeSpeak and Mr. Cramer on Hedge Fund of Funds

2009-05-30T13:54:00.004-04:00

Many may have forgotten a less than flattering description of "Fund of Funds" provided by Jim Cramer on May 12th 2005 on RealMoney:

“They are called "fund of fund" guys, and they tend to be fantastic salesmen, with slick charts, lots of metrics and a sense of risk that makes them seem like they are geniuses."

“Of course, if they were geniuses, they actually would be running money. They don't. They take other people's money, and for a fee, they put the money with still other people. They are middlemen.”

“OK, full disclosure: I always hated these guys. …. I thought they were parasites put on earth to prey on rich people and institutions too dumb or lazy to do their own work. I had total contempt for them. ”

As I read the post by Jim, I recognized back in 2005, that he was dead on with his thesis for a majority of the 1000 or so hedge fund of fund managers. That said, there are a select few that truly add value when allocating the monies. These "allocators" have the team experience that can actually perform thorough due diligence on management, portfolio construction, operational and portfolio risk on their underlying managers.

The fund of funds industry grew as a cottage industry where originally they would simply provide "access" to managers instead of "due diligence" on managers. I refer to "access" providers as "relationship/marketing" firms. A majority of those rleationship firms that do not re-focus their model to "due diligence" will invariably disappear in this Post Madoff market.

In this case, Jim Cramer was prescient and the fund of funds industry needs to reorient and redefine itself in order to emerge in a more credible light going forward.

Where there is smoke...?

2009-05-29T16:53:00.003-04:00

Where there is smoke... there may be fire... or not. The following is a note you never want to receive as an investor.

July 31, 1998

“As soon as the mispricing was identified, XYZ commenced an investigation concerning the portfolio valuations and has adopted revised internal pricing procedures…”

Again, this is dated from over 10 years ago and it is important that people recognize the need for process and policies at all investment firms however big or small. It remains one of the achilles heel of the hedge fund industry that managers "under-invest" in infrastructure and/or choose to "outsource" in order to maintain low costs.

The eventual result of the above investigation resulted in the firm being shut down with significant losses and several other sanctions for the manager.

Where there was smoke... in this one case... there was an actual fire.

HedgeSpeak: The Art of finding the right "Quote"

2009-05-28T09:14:00.001-04:00

Invariably, managers letters describing the past years performance would often start with a famous quote. Often after a poor performance year. This was proven when in January 1999, 2000 and 2001 multiple managers managing different strategies all used the following quote in their first paragraph:

“To borrow a quote from a Charles Dickens’, A Tale of Two Cities, which aptly depicts XYZ’s return profile for the year: ‘It was the best of times it was the worst of times’.”

I would always wonder if there was a course "Hedge Fund Writing Class 101" that many hedge fund managers or their respective ghost writing marketing staff would attend.

Whenever I hear Dickens mentioned, I immediately now relate to bad returns and the hedge fund industry.

Hedge Fund Redemption 101

2009-05-27T18:15:00.000-04:00

The following quote was taken from a hedge fund manager letter sent back in September 21, 1998. Yes, ten years ago.

“The Board of Directors of (our fund)…made proposals to invest additional capital…has agreed to reduce the management fee in (our fund) from 2.4% per annum to 1.5%…”

“Our fund must also understand whether or not clients who have sent in provisional redemption notices actually wish to redeem as it makes it more difficult to assess that outflow of funds without this information.”

“…has decided to suspend redemptions of the shares of the Fund in accordance with Section VI…”

How the industry forgets lessons from our past. The letter first demonstrates the charitable side of the managment team by reducing a rather high management fee.

In the second paragraph they appear to believe that investors had no actual intention of redeeming and hope that with the "offered fee reduction" in the first paragraph investors would remain invested with the fund.

All of the above is then discarded with the statement announcing the the fund has suspended redemptions...

A decade later we discover that there remains a very long road for the hedge fund industry to implement best practices...