Posts Tagged Hedge Funds

The NY Times article below profiling the billions hedge fund managers just made on the backs of their so called “clients” just spoiled my breakfast.  That, and a recent heart to heart with a good friend of mine whom pays me to advise on his wealth inspired me to write this long-winded “tell all” with a lot of personality.   I just confronted his out of character bad thinking and fear.  My goal was to help him rationally really grow his wealth while limiting the risk as much as possible not talk politics.  Because we are sincere personal friends, I was able to be brutally honest.   After a spirited exchange he just said, “Ben, (expletive) you’re right” and he encouraged me to tell it like it is.  I can still hear is elegant southern accent, “Ben, (expletive), tell your client’s what you just told me at don’t p___y foot around!”  Who can say that and it still sounds charming?  He can.  So, friends, I’ll try and be more witty than bittersweet.  Think of me as the consigliore whispering the truth in soft voice behind the king or queen’s ear, ”The financial industry is rigged.  You do not need to pay a manager to control your savings because his common sense is better than yours for 2% a year and 20% of the profits while he churns your positions and sticks you with the tax bill. Oh, and when times are hard he doesn’t give you your money back until he’s making money again.  The shares are “illiquid”  .”  I believe that business people whom believe that they are just normal people and worked for decades to build savings but never really “minded” those savings (just their careers) are waking up to smell the coffee.  The greedy joke in the financial business is simply, “The money is in the money.”  The joke is true and for two reasons.  One, because the calculated return on investment of your capital (called Return On Investment) versus cash and sweat that we all put into our business endeavors is probably a higher return.  Translate.  You are probably not as profitable in your business or profession as you’d like to think.  I certainly wasn’t.  I can’t tell you about all the bad marketing ideas I threw money at or employees that hung around without adding value.  The flip side of the joke is even more hurtful, that the people who manage your money (and the vast unseen bacchanal around them) are the ones “making the money”.  Get it.  “The MONEY is in the muuuneee” is the way the joke is told and always with a derisory, knowing smile.  In other words, nobody in the money industry cares if you make money.  That is why the code word, “Assets Under Management” is the holy grail.  All that matters is how much money is under management, not whether it grows because it was wisely invested.  Investors can check in, and check out.  Who cares and who cares if they made money?  As long as “assets under management” are growing, the money machine is growing.  That is the Investment Business. Period.  Which why investors, and especially individual investors, have to stand up and stop it.  They have to take responsibility.

A colleague of mine who is still in the pressure cooker of Private Banking for one of the majors privately mourned to me that he is sick of “pushing products.”  When he pulled out the fact sheets of the “fund of funds” that they sell, I couldn’t figure out if I wanted to laugh or cry.  Think about it.  You buy a mutual fund that buys dozens of other mutual funds.  Translate.  That means after the banks/brokerages rob you, they spit in your eye.  It is putting layers and layers of people whom are taking a bite out of your precious capital whether you make money or not.  Perhaps, I’m a traitor to the industry?  Let’s hope I don’t have to watch my back but, I’m sorry, there is just not enough to go around.  Investors, services are not free and shouldn’t be.  Pictet, for example, is going to make 4/10ths of 1 percent on every penny sitting in the account. That is $4,000 per 1,000,000.  It is fair because they are providing you the “garage” to park your wealth and platform to buy currencies and securities all over the world.   It is also transparent and safe.  Instead of loaning your money out (think Citicorp) or trading with it (think Lehman), they simply provide the service of custody and access.  They may make a few hundred bucks every time you buy shares but believe me that strategy doesn’t make your account profitable for the bank.  This model, called closely held private banks, has been absolutely vindicated by the financial crisis of 2008.  Now, if you start buying bad products from the product broker or supplier then shame on us.  This is why, as an investment advisor I stick to the rule.  No funds.  No hedge funds.  No structured products.  No annuities.  Not even ETF’s.  No nothing that has a mechanism to bill you or hold you hostage or put some middle man in the driver’s seat.  This is why we sit on currencies and we buy individual shares.  Once you own the shares, you own the shares.  There is nobody between you and your money.  Also, you have control over your tax liability.  You only pay capital gains when you sell.  Cost efficiency is more important than you realize.  Every percentage points make a huge difference after, say, ten years.  It’s like the difference between a 1mm account being 4mm and 3mm.  I’m not exaggerating either.

Keep following my thinking here….almost finished.

Now, let’s get to my role.  My business, CR Investment Advisors, charges our clients an independent fee 1/4 of one percent every three months (called 25 basis points) or think of the fee as 1% a year ONLY on the equities that we are advising on.  I soul searched to design my fee structure.  I don’t know anyone who has a similar fee structure.  Most managers/advisors charge one to three percent of the total portfolio and if they are really ugly they still push products that pay them fees.  I even considered charging 50 basis points on the whole portfolio and calling it a day, but it didn’t feel right.  Why would someone pay me 50 basis points on cash that pays 20 basis points or a bond that pays a few percentage points.  Clients can clip coupons just as good as I can clip them for you.  At least pay for advice that is meaningful.   Regarding cash that is sitting on the sidelines, the reality of currencies is that you buy different ones and hedge them against each other simply to protect the “value” or “storer of value” of cash, unless you’re a gambler on short term currency movements.  I can tell you that and you do it yourself.  Everything I think about investing, I put on my blog anyway.  My passion is true investing and growing wealth.  I want see the capital appreciate.  We might as well  grab the bull by the horns and just face the dilemna of investing instead of stand there and get gored.  Giving investment advice takes courage more than just self confidence.  That is how I differentiate myself as an advisor and sleep.  We all have dreams and wealth gives us “arms and legs” to pursue them with a bit more ease.  Growing wealth matters and it is important work.  We all are going to lose our savings ability to buy things in the future if we don’t have the guts to take a stand and positions.  Inflation will just eat the value away.  As my smart wife says with deadpan disbelief, “It’s hard having money.”  By doing nothing, you are a making a decision (an unconscious one) to lose your money, passively.  Darn it! At least go down kicking and screaming if you have to but don’t just do nothing by sitting on a bank CD or acting like you don’t know your getting cork-screwed by investment products and fair weather friends you pay!  Don’t lie to yourself that somehow your entire estate, which is denominated in US dollar won’t be effected by the 13 Trillion$ US Federal Debt (and 100 Trillion of unfunded liabilities) isn’t going to depress the value of the dollar in this world.  And don’t settle for poor performance and just fade away.  That’s why we take positions and protect them by buying more when they are down.  That is my message and I believe it strongly.  I feel the same about engaging international markets, even frontier markets.  Let’s be honest.  The United States is not what it used be and Europe never changed. It’s like watching two bald men fight over a comb.  I’m not saying you can’t make money in those regions.  I’m just saying you are more likely to make more money in environments that crackling and popping with economic activity.  Emerging Markets and Frontier markets are like Rocky in the original Rocky.  They are hungry in every sense.  The fat, dumb and happy “West” is like Rocky in Rocky 3 before Mr. T predicted “pain”.  Friends, I am your personal trainer that is compelling you and saying, “Do just one more sit-up, you can do it!”  The day you don’t need me, I don’t want you to pay me.  It would only be an affirmation that I did a damn good job.  We all know that is better than a few coins.  That is why I don’t deal in contracts other than an honest word.  At will is the only way to relate with real reciprocity.  If someone isn’t adding value in someone else’s life or if someone is just taking and not giving, well, it just doesn’t work.  Debasing is the word that comes to mind.  I am going to give you everything I have to help you make wise decisions about your precious hard earned capital because I say I am.  And, yes, I also do with my own money what I advise that others do.  I’ve made those commitment to myself.  I also know how undignified it feels to have a boss place your pinky finger in a cigar cutter while reviewing the “metrics table” of the profitability of your life before you get back on the horn to tell your clients how great that new front loaded mutual fund really is.  It’s that personal.  All of it.  So, let’s push this boat out to sea and get wet.  Let’s not be afraid of the strong winds or when that mast unexpectedly swings and nearly kills us.  We’re gonna jealously guard your cash and yet not be afraid to take positions and double down when everyone else is running back to the trench.  You can do it!

P.S.  Imagine the gentleman in the photo below telling the joke, “The MONEY is in the muneeee.”  Notice, that each of them also have a naturally derisory smile.

Tell Em' To Take A Hike

http://www.nytimes.com/2010/04/01/business/01hedge.html?hp

Tellin' It Like Is!

I continue to be surprised by the trend this year. The WSJ reported this morning that 25 billion dollars will flow back by the end of this year. Clearly the bulk of money is going into more stable hedge funds like Blackstone Group LP. We suspected investors would be more wary of the value that talented hedge fund managers are truly adding as well investors learned that hedge funds are not necessarily liquid. But I guess the old adage that “you have to put the money somewhere” is bringing them back. “Market sentiment” is really a joke (see youtube link below). Friends, let’s keep focused on buying and building positions on securities that we believe in over the long run.

http://online.wsj.com/article/SB124958905447712097.html

View this hilarious British Comedy Interview and you’ll get my point about Market Sentiment being a joke.

This article caught my eye because I too am surprised that hedge funds still command 2 percent a year and 20 percent of performance, but apparently they still do. Our network has moved away from hedge funds and probably will be a lot more skeptical of the value added by talented managers and a lot more slow to bite next time. I will agree with them.

http://www.bloomberg.com/apps/news?pid=20601087&sid=alzFG07Pm3iU