Hedge Funds

Discussion in 'Professional Trading' started by FXsKaLpEr, Oct 13, 2005.

  1. Small-Time Crooks
    Michael Maiello, 10.02.03, 2:20 PM ET

    Steve Markovitz, a former trader with the $4 billion Millennium Partners hedge fund, pleaded guilty to a felony charge in connection with the aftermarket trading of mutual fund shares.

    The cozy relationship between mutual fund companies like Bank of America (nyse: BAC - news - people ) and Janus Capital Group (nyse: JNS - news - people ) that allowed hedge funds to profit at the expense of mutual fund shareholders was brought to light by New York Attorney General Eliot Spitzer last month. A step behind Spitzer, the U.S. Securities and Exchange Commission (SEC) announced this week that it would implement new regulations for the $600 billion hedge fund industry. The rules are especially aimed at the larger funds like Millennium-- funds with less than $25 million under management are exempt.

    Unfortunately for investors, the world of small hedge funds is a cesspool of fraud and mismanagement. By focusing only on the largest players, the SEC has left the most vulnerable hedge fund investors to fend for themselves. Under the new rules, U.S.-based hedge fund managers with more than $25 million in assets will now have to register as investment advisers with the SEC, and the agency will have the right to examine their records whenever its regulators see fit.

    The SEC also decided that investors will need a net worth of $1.5 million (it used to be $1 million) to be qualified to invest in hedge funds. Since homes and real estate factor into the net worth calculation, the requirement is hardly onerous. Larger hedge funds demands initial investments of between $100,000 and $5 million, and they want high-net-worth clients who can invest such sums and then forget about the money for awhile. Only the smaller funds target investors who have just crossed the millionaire cusp.

    A glance through the SEC's litigation releases gives a sense of what awaits investors in the world of micro-hedge funds:

    In September, the agency filed a complaint against the $1.4 million Millennium Capital Hedge Fund, based in Gilbert, Ariz., and managed by Andreas F. Zybell. Millennium Capital, which is not affiliated with Millennium Partners, would never have had to register with the SEC, since it set out to raise just $5 million last year. The SEC says that Zybell told investors the fund was up 46% by the end of June, while it was actually up less than 14%. Also, Zybell never told investors that the state of Nevada had revoked Millennium's limited partnership status for failure to file forms with the state. The SEC hopes a court will order to stop Zybell from doing business.

    Last year, Peter W. Chabot of Chabot Investments pled guilty to securities fraud in New York's southern district court. Chabot had raised $1.2 million from 14 investors by claiming he was an experienced securities trader who had developed a mathematical model telling him when to buy or short stocks. Between 1999 and 2001, Chabot claimed stupendous results for his theory. But the results were phony, and Chabot had actually used his investors' money for his personal expenses. In February 2002, he was sentenced to 27 months in prison; he also has to pay back the $1.2 million.

    In the summer of 2002, the SEC accused Von Christopher Cummings of running a $15 million Ponzi scheme through the Ohio-based Paramount Financial Partners Hedge Fund. That case is still in court.

    Who knows what schemes have fallen beneath the SEC's notice? Of course, the notoriously overworked and understaffed commission has to prioritize. The issue of hedge fund regulation really came to prominence in 1998 when the failure of Long Term Capital Management required banks like UBS (nyse: UBS - news - people ), Goldman Sachs (nyse: GS - news - people ) and Merrill Lynch (nyse: MER - news - people ) to fund a $3.5 billion bailout of the fund to prevent damage to the entire American banking system. Long Term Capital's woes were caused by a failure in strategy, not fraud, but the ramifications were felt throughout the world's equity markets.

    There are also plenty of frauds among larger hedge funds to keep the SEC busy. A year after Long Term Capital, Michael Berger's Manhattan Investment Fund collapsed. Berger's $400 million hedge fund turned out to be a Ponzi scheme (see "Bear Trap"). In late 2002, the $2 billion Beacon Hill hedge funds imploded. The SEC alleges that Beacon's managers had purposefully overstated returns and hid losses from investors. The new rules are a step by the SEC to prevent massive losses caused by fraud or mismanagement by hedge fund managers.

    But if the SEC is going to protect small investors who enter the hedge fund world, the agency can't let smaller funds off the hook. The SEC needs to work in concert with private regulatory bodies like the NASD (formerly the National Association of Securities Dealers), the New York Stock Exchange and state securities regulators to make sure that small hedge fund managers are registered and reviewed just like their larger brethren.

    There's a place for private companies here, too. Bear Stearns (nyse: BSC - news - people ) is the clearing broker of choice for hedge funds large and small. Ever since Berger ran his Ponzi scheme through Bear accounts, the company has been increasingly willing to let the SEC know if it thinks something's amiss with one of its hedge fund clients. Other clearing brokers should follow Bear's lead to help keep the industry safe until a regulatory solution can be implemented.
  2. yo, RipZ, good article - where you been??

  3. Hedge Funds May Be Worth Less Than You Think


    Oct. 13 (Bloomberg) -- There is no quicker way to make lots of money than starting a hedge fund, right?

    Wrong. Hedge funds may not be worth as much as you think.

    The evidence from the two listed hedge fund operators in London -- including Man Group Plc and Rab Capital Plc -- is that even though such investments are good ways to boost income, they aren't generating great returns for the managers. You might be better off going into, say, plumbing supplies, or Internet poker, both of which may have better growth prospects.

    In effect, the market is saying the hedge fund industry has little growth left in it.

    ``The market doesn't put much of a premium on hedge fund profits,'' said Tim Price, senior investment strategist at Ansbacher & Co. in London, in a telephone interview. ``The quality- of-earnings issue is paramount.''

    The hedge fund industry has exploded in recent years. It had an estimated $1.03 trillion in funds under management in the second quarter, according to Chicago-based Hedge Fund Research Inc. Big names are still drifting across from mainstream investment banking into hedge funds. Only last month, for example, Pequot Capital Management Inc., a U.S. hedge fund, said Byron Wien, Morgan Stanley's senior stock market strategist, would join as chief investment strategist.

    $1 Billion

    No one would doubt that the founders of those companies are making a lot of money, mainly through paying themselves huge dividends and salaries. Edward Lampert, chairman of Greenwich, Connecticut-based ESL Investments Inc., earned $1 billion last year, more than any other hedge fund manager, while the average earnings for the top 25 executives in his industry rose 21 percent to $251 million, according to Institutional Investor's Alpha magazine. That sounds like more than enough to get you out of bed on a Monday morning.

    The mystery is why companies that are making enough money to pay $250 million-plus salaries don't want to list their shares.

    It is clearly not because they don't have the cash flow. Nor can it be because their owners aren't interested in making money - - why else would you start a hedge fund?

    The hedge fund frenzy is often compared to the dot-com boom of the late 1990s, and with good reason: Both have attracted lots of clever young entrepreneurs, intent on getting rich fast. There is a key difference, however. While the dot-com managers created lots of quoted companies that had little revenue, the hedge fund industry has done the opposite. It has come up with companies that have plenty of revenue, yet very few of them are quoted. Whereas the Internet entrepreneurs created capital, not income, the hedge funds create income, yet very little capital.

    P/E Ratios

    Why's that? There is a clue in London. Its two quoted hedge funds have been denied market endorsement. Two companies may be a small sample, but since they are the only two quoted hedge fund companies, there isn't anything else to go on.

    Man Group trades at a historic price-earnings ratio of 14, according to Bloomberg data, and a prospective ratio of 11. By comparison, Amvescap Plc, a large U.K. money manager, trades at a prospective P/E ratio of 17 and Aberdeen Asset Management Plc is at 21. So the market is telling us that each pound or dollar Man Group earns is less valuable in relative terms.

    Rather surprisingly, plumbing supplies may be a better business to be in than hedge funds. Wolseley Plc, a U.K. plumbing distributor, trades on a prospective P/E ratio of 12, slightly more than Man Group.

    Likewise, RAB Capital, whose current P/E ratio is 16 and whose forward ratio is 13. The company more than doubled its profit in the first half and increased management fees by 41 percent. Yet it is still valued as if it were an average business. For example, the FTSE 100 index had an average P/E ratio of 20 in the week through Oct. 7.

    20 Percent Fees

    There is a straightforward explanation for that. The relatively low price put on the hedge fund companies says two things. First, the rapid growth rates of the industry probably won't last. Next, the 20 percent performance fee that hedge funds typically charge can't last, either. In effect, the business model the hedge funds have created won't work much longer.

    ``In times past we have argued that Man Group's hedge fund business deserves to trade in the midst of the trading range for traditional asset managers of 15 times earnings per share to 20 times earnings per share,'' Credit Suisse First Boston said in a recent note on Man Group. ``Increasingly we believe that the market is unlikely to ascribe such a valuation to Man Group, given high fee structures and the concerns over their longer-term sustainability.''

    `Drop in the Ocean'

    There are plenty of worries about hedge funds. The performance fees may eventually have to come down. And most of the firms are dependent on a handful of talented individuals.

    Were they to walk out the door, the companies they work for would be less valuable. Maybe that is why the market doesn't trust them. A company such as ESL wouldn't be worth much without Lampert.

    That may not mean there isn't some growth left in the industry. ``The market is assuming that the flood of money into hedge funds is going to slow down,'' Price said. ``I'm not sure that is the case. It is still just a drop in the ocean of the total asset management industry.''

    Right now, that isn't what the market is telling us.

    That explains why very few hedge funds have gone public, even though they've generated huge profits. If there is one thing hedge fund managers are good at, it is spotting undervalued assets, all the more so when the asset in question is their own company.

    And until the market changes its mind about hedge funds, none of the companies will follow the lead of Man Group and Rab Capital and list their shares. If the market won't put a fair price on them, why should they go public?
  4. lol riply's taking a walk down memory lane
  5. I don't know sKaLpZ... Such a fine young man such as yourself just doesn't seem like the Hedge Fund type... (crooks, and blood sucking leeches..)
  6. newtoet


  7. It's generally true that the financial companies have lower P/E than others, because of

    1) the earning volatility

    2) the company, especially, IBs, will reward the employees first and stock holders second

  8. my thought is, regarding hedge funds, with all the problems they are experiencing now, poorer and poorer returns, scams and schemes popping up left and right, the reform I'd like to see initiated for change STARTS by hammering the rich investors.

    Investors in hedge funds have had a free joy ride for decades, now it's caught up to the funds.

    Pay (earnings), or rather, better pay (MUCH better pay) tends to produce much better performance results.

    That's market law.

    The most practical, direct and effective way of achieving this is by reducing payouts to investors.

    Since, universally, investors have nowhere to go to better their returns or diversify their portolios other than to hedge funds that, due to their nature, can re-invest the moneys placed into their custody in broad yet specialized niches "sophisticated" investors don't have a clue as how to even begin accessing let alone trade.

    such as trading global currencies: A 'hot' market right now.

    so, I propose strong measures be taken to whip-down on the do-nothing investors, and pass along the burden of profiting to the investors for the sake of the funds and those who run them.

    It has hence been and continues to be a cake walk in which investors get their cake and eat it too.

    that has to change.

    nothing motivates and inspires creativity (I speak of earning profits by trading) more than money.

    because bullsht walks, and traders talk.

    therefore, the first place for HF managers/traders to look for hidden cash is in those HUGE payout %s pig-rich investors have grown accustomed to enriching themselves therewith.

    they need to be slashed.

    this will help the entire industry immensely.

    Not only will top performing managers/traders do better, the overall HF industry will induct the world's top traders into it by offering much better pay plans.

    It's the only way, and the best way to achieve higher returns across the board.

    should I get further into the industry, cutbacks on investor's pay and increases in managers'/traders' pay will be the first thing I will tackle, address and aggressively push for when I get onboard.

    as previously, 2% was recognized as stardard management fee, that needs to double to 4% minimum.

    and, the 20% "performance fee" must be raised to at least 40%.

    thank you.

    *steps down from the podium*

  9. ok skaplz

    I'll tell it to you straight out.
    Because you are looking like a 14 year old kid who just got mugged for his lunch money.

    1) To be rich, you do not hate the rich, or hate their money, you look to help make them richer while making yourself just a little bit more wealthy.

    2) The rich are better then you, if you want money from them, they obviously have much more then you

    3) all I hear is you you you,
    unfortunately, for a person who can trade well I never hear that
    because they can make their own money

    4) You are not special, there are lot of amateur investors who make 5-10% with their small stash
    People with millions to INVEST are special, they are few and in between, you are plenty, they are scarce, they are cindy crawford, you are hunchback of the notre dame

    why do you think you can make any kind of demands?

    5) If you can make your own money, investors/hedge funds will come to you, when you make your first million

    they will come
    until then, stop dreaming and keep working

    if you can't even make a million, who in the world will think you can ever make a dime more with their hundreds of millions or billions?

    Stop dreaming and get back to work.
    #10     Oct 13, 2005