Today's Post

    Do Hedge Funds Work? "...If all the money that's ever been invested in hedge funds had been put in treasury bills instead, the results would have been twice as good..." This is the astonishing finding of Simon Lack in his book "The Hedge Fund Mirage".

    With almost $2 trillion in assets under management (AUM), the hedge fund industry has earned a reputation as being at the 'top-gun' end of finance.  An environment where PhD's, Nobel Laureates and experts seek out exceptional returns for their clients.  The problem is, Simon's calculations check-out, and the truth is "...Since 1998, the effective return to hedge-fund clients has only been 2.1% a year..."  leading to the conclusion that, "...never in the history of Finance was so much paid by so  many for so little..." Simon spent 23 years at JP Morgan (where he sat on the firm's investment committee allocating in excess of $ 1 billion to hedge fund managers) before founding SL Advisors LLC. Q: What accounts for the huge growth of hedge funds? Simon Lack: They have generated some great results for investors, albeit in aggregate during the early  90’s… when it was still a small industry.  I remember investing in hedge funds during that period… they were obscure strategies, you’d go and see some trader in an ...

Featured Post


CAIA Corner: Walk Like an Endowment


The sixty largest US college endowments (those with over $1 billion in assets) once again have chart-topping performance. After suffering drawdowns and liquidity issues in 2008 and2009, these large endowments earned average returns of 12.2% in the fiscal year ending June 30, 2010, the latest period available, which beat the returns of smaller college endowments over the same period. Ten year annualized returns of 5.0% refute the idea of a lost decade, and the three-year drawdown of an annualized -3.5% ...


Occupy Wall Street (OWS), Social Networking, and the 1%: Systemic Risk to Alpha Generators?

We visit a Town Hall meeting to discuss the Occupy Wall Street group's use of social media. While there, we are reminded of the potential power of social media and its use to affect public opinion without spending gobs of money. We also learn reasons why the investment community should, at minimum, pay some attention.

You, dear reader, are probably either part of the 1%, or a 1% wanna-be.  As a typically rational person who can identify his own self-interest, you may have wondered vaguely about the Occupy Wall Street (OWS) movement, what it is, and whether you should look up from or further into your computer screen to find out about it. Town Hall Meeting On your behalf, we got curious when we got an invitation from Alan Brody of Ibreakfast.com to attend a Town Hall ...

Guest Posts


‘Turtles—Turtles—Turtles All the Way Down’

By John Brynjolfsson, CIO Armored Wolf As markets reel in the wake of the failed German Bund auction that occurred earlier this week, our beliefs regarding financial security are rightly shaken down to their very foundation, and below! After all, 10-Year government bonds, at least as introduced to students in business schools over the past 70 years, are a way for those who have cash in their pocket to transport that cash, risklessly, 10-years into the future.  If so, what better government ...


Private Equity

European PE Study: The Locusts May Not Be So Bad
Two scholars affiliated with the Center for European Economic Research, drawing upon European data between 2000 and 2008, maintain that PE backed companies do not suffer from higher bankruptcy rates than their control group of comparable companies. Their paper also addresses the relationship between bankruptcy risk on the one hand and the syndicated (or, conversely, the stand-alone) nature of a PE deal. It finds no significant relationship.

Tereza Tykvová and Mariela Borell co-authored a study last fall with the title, “Do Private Equity Owners Increase Risk of Financial Distress and Bankruptcy?” which reaches a paradoxical seeming pair of conclusions. First, they say, yes, distress risk does increase after a buy-out by a private equity firm. Second, they say, no, PE backed companies do not experience higher bankruptcy rates than non-buyout companies. The apparent paradox is due to selection bias, although Tykvová and Borelli, who are both affiliated with the Centre for European Economic Research in Mannheim, Germany, don’t ...

Infrastructure

Infrastructure: High in hiearchy of investors’ needs and hearts
Infrastructure is a basic need for any country, no matter what size. However, investing in infrastructure funds has been scant since its peak in 2007. That may be about to change.

Human beings’ basic needs are food, clothing and shelter according to Maslow's Hierarchy. In a similar way, countries, whether they are mature and aging, developing or emerging require infrastructure in order to function and grow. Like most other asset classes, infrastructure suffered a dearth of dollars throughout the financial crises, but this alternative asset class is once again finding its way into the hearts and portfolios of institutional investors. Since the financial crises of 2008 and 2009 unlisted infrastructure funds growth has been stagnant, as uncertainty has kept institutional investors from ...

Private Equity

The Middle Markets in 2012: Oh, to Be Investment Grade, Cash Rich, and In Love!
In spite of what the media might have us believe, it isn't quite the end of the world as we know it, particularly as it applies to European private equity.

We recently attended a meeting wherein some of the savants of the middle market domain held forth on the outlook for mergers and acquisition this year.  The panel, sponsored by the Association for Corporate Growth, featured comments by Tom Dippel of Houlihan & Lokey, Murray Beach of TM Capital, and Didier Choix of DDA Company. Tom Dippel noted that the market had begun to get its sea legs after falling out of bed in 2008 and 2009.   The markets proved yet again that the end of the world is notoriously unreliable.    ...

Institutional Investing

Merlin on Investor Due Diligence: Counting By Threes
First, an investor (according to a new white paper on due diligence from Merlin Securities) must decide what kind of strategy it is to which he wants exposure, and generate a list of managers who practice that strategy. Thereafter he can focus on each firm on that list looking at each of the three (qualitative) components of management, and subjecting his impressions to a variety of (quantitative) tests. Tripartite divisions seem to come into play a lot.

The game “twenty questions” implicitly divides the world into three parts: animal, vegetable, mineral. Greek philosophy has its tripartite soul: intellect, spirit, and appetite..Dorothy Gale of Kansas had three companions each representing one of those same three components. German philosophy had its dialectical movement: thesis, antithesis, synthesis. A Presidential candidate recently demanded the abolition of three cabinet departments, though he could only name two. Tripartite divisions clearly appeal to something deep in the human soul. Merlin Securities, the prime brokerage services and technology provider, has confirmed this psychological fact in its ...

Timely Research

SEI: Hedge Funds May Draw the Lightning on Themselves
The SEI asked institutional investors in hedge funds what was the number one reason for their inclusion of such funds in their portfolio. The most popular single choice was "absolute return." On the other hand, if you combine the numbers of the distinct answers that involve limiting the downside, then the percentage of respondents who gave some risk-management focused answer is 56 percent. As SEI says, this is "a marked cultural shift from the early days of hedge funds, when many investors focused on their potential to produce outsided returns."

SEI, in association with Greenwich Associates, is publishing the results of its fifth annual global survey of institutional hedge fund investors. Part I of II of its report on “The Shifting Hedge Fund Landscape” is now available. Part I focuses on current trends in the hedge fund industry, whereas a forthcoming Part II will look at the “continuing evolution of institutional standards for hedge fund evaluation, selection and monitoring.” The bottom line is that investors want it ...

ETFs

Future of Asia’s Synthetic ETF Market May Lie With Singapore Regulators
In Singapore, some of the synthetic ETFs involve considerably more exposure to uncollateralized counterparty risk than the 10 percent or less that UCITS would allow. Singapore has, for example, the iShares MSCI India tracker, which has a 20 to 25 percent exposure. But Celent sees a possibiliuty that laxity will prove a winning move vis-a-vis Hong Kong.

Celent expects that there will continue to be a global trend of increasing volume for physical ETFs in the Asian markets, but it does not necessarily expect a booming future there for synthetic ETFs. In a recent white paper, “Synthetic ETFs in Asia-Pacific: A Losing Battle?” Senior Analyst Anshuman Jaswal makes the case that the Asian market “might struggle to grow at the same pace in the future.” It appears that much will depend on ...

Hedge Fund Regulation

AIMA Takes Aim at FTT Proposal
AIMA, in a report sharply critical of the proposed European Union financial transaction tax, sets out the way in which the tax could burden businesses, and their consumers, to a degree far greater than the proponents contend. After all, any single product may pass through several stages between raw materials and final consumer, as there are several steps between farmer harvesting wheat and retail outlet, such as Tesco, selling pasta. Businesses at every stop along the way (farmers, wheat processers, pasta extruders) will naturally want to hedge their own operational risks in the financial markets, so the price of the finished product will reflect the repeated imposition of the FTT.

The Alternative Investment Management Association has issued a Research Note assessing – quite unfavorably – the European Commission’s recent proposal for a financial transactions ta What is the FTT? The EC’s proposal, set out in September, would, in the event all the member states agree, hit all transactions of equities or bonds at 0.1 percent of value, and all derivatives transactions at 0.01 percent of notional value. This is not a “Tobin tax,” though the proposal surely ...

Alpha Strategies

Going ‘A Few Rounds’ North Of the Border
It seems that Patrick Byrne is interested in using a lawsuit filed in Canada in October 2011 as an opportunity for contesting the substantive merits, that is, providing evidence that the conspiracy exists as described and that Nazerali’s part in it was accurately portrayed in the various webpages of Deep Capture (called “chapters” for some reason). That may well prove healthy.

Allegations of a great “naked shorting” conspiracy have become ever more byzantine over time. They were bound to attract defamation litigation, as indeed they have. It is important to take note of this – whatever one thinks about the proper shape of defamation law – because to the extent they receive public credence such allegations represent a stigmatization of the search for alpha, a stigmatization of the legitimacy of speculation itself. That in October Altaf Nazerali ...