Comments on Rick Bookstaber: The 7 Habits of Highly Suspicious Hedge Funds

First time view of the blog. Impressive background...

2009-09-28T04:23:35.567-04:00

First time view of the blog. Impressive background. I think the jist of the post is fine and correct, although to be fair this is standard fare for any fund of hedge funds and has been for years (yes, even before Madoff). Managed accounts are commonplace and becoming more so. If you want investment these days, you better be thinking about managed accounts. Transparency and liquidity are the key requirements for investors today. And the balance has definitely shifted to the investor post Madoff. firms that find managed accounts difficult to live with are the ones who have illiquid investments and cannot live with the withdrawal of capital - distressed debt etc. No manager wants a liquidity mismatch. And trading against positions, not sure about that. The investor would have to understand the trading rationale behind the hundreds of positions on the book to replicate the strategy. Needs knowledge and resources to do that. The investor tends to be downstream of the manager, e.g. pension fund, fund of fund rather than one of the peer group (although that does of course happen).

I wonder what your thoughts are on the high-water ...

2009-07-07T22:06:26.148-04:00

I wonder what your thoughts are on the high-water mark incentive scheme. Is it on balance a good or bad thing for hedge fund investors? Does not paying fees for losses to the NAV overcome the tendency to "swing for the fences" to get back into the black?

The absence of a substantial firm of accountants a...

2009-06-30T06:14:59.783-04:00

The absence of a substantial firm of accountants as an auditor would be a number one red flag for me.

Rich - a sound and sensible assessment imho as a n...

2009-06-28T18:14:27.755-04:00

Rich - a sound and sensible assessment imho as a non-finance guy and it works well against your prior post on value-add by the hedgies. Steinhardt gave a WSJ interview (last year ?) that pointed out in the day that there were very few hedge funds and they enjoyed exceptional returns as innovators with good talent;but as the industry grew (too fast)the size, complexities and drying up of the talent pool would lead to poor performance. Which seems to be what's happening even without the kind of hard-nosed data you suggest.
The other thing that strikes me about this post is home much it follows two classic general business syndromes. The hot hand startup that is out of control and the "widespreadness" of bad business practice as a result. In other words we got another sock puppet boom going here.
Would you care to take a similar pass at the private equity industry ? For years the good returns have been top decile/quartile results while the rest were along for the ride. Current estimates are for at least 25% to go out of business. One thing I notice in particular is that despite the PR and protestations they don't actually pay much attention to the real business of their portfolio companies if they can avoid it. That seems to me be a differentiators between the possible survivors and the other 3/4 of the industry.
Thoughts and reactions ?

Rick, I am delighted to have found your blog. I h...

2009-06-26T16:34:30.830-04:00

Rick,

I am delighted to have found your blog. I hope you don't mind but i have linked to this article from my blog. I am the founder/editor of SimoleonSense.com a website dedicated to making investors more well rounded.

Best,
Miguel Barbosa
SimoleonSense.com

Excellent piece. This reinforces my opinion that a...

2009-06-26T11:32:23.413-04:00

Excellent piece. This reinforces my opinion that a handful of people out there will be coming up with some truly innovative ways to structure funds in the future to mitigate these issues.

(hint: I'm trying to launch just such a fund in a few months, and old-timer fund managers will hate how I deal with fees and transparency)

These warning signs fit well into today's news...

2009-06-25T09:56:24.668-04:00

These warning signs fit well into today's news. As I was reading, each one stood out to me as keywords for the recent happenings and ponzi's

Yeah, we ran across that problem about 8 years ago...

2009-06-23T11:09:33.303-04:00

Yeah, we ran across that problem about 8 years ago. Someone with a managed account who gets the reporting at T +1 can come a day away from replicating the strategy and the 1 day of lag time should beat the 2 & 20 fees. I hear your argument for hedge funds not wanting to disclose their positions (some positions are known , ask Brian hunter and John Arnold). But to me the bottom line is this. If a fund is going to ask me to trust them with my money they are going to have to trust me to see their position. As an investor I’ll sign an NDA or other legal doc that gives the fund some guarantee that I’ll keep the positions confidential and not go off and start my own fund. BTW- I cannot wait to read your book.

Managed accounts are certainly a way out of this. ...

2009-06-23T10:34:45.208-04:00

Managed accounts are certainly a way out of this. But it leads to transparency problems for hedge funds, because the person with the managed account can see what they are doing.

So, for example, I could put a small amount in a great fund, look at my positions and then replicate it for free. Or if I were a competitor, I could trade against their positions -- squeeze their shorts, or pile into their growing exposures, thereby running the price up before they have fully invested.

One way around this is to have managed accounts where the positions are only viewable by the client with a lag of, say, a month.

Great post - I think there is an opportunity here...

2009-06-23T10:16:34.566-04:00

Great post - I think there is an opportunity here for 3rd part reporting, but it would mainly be focused at managed accounts. The good news about this, in my humble opinion, is that we will probably see a significant migration from fund accounts to managed accounts. The managed accounts give the transparency that investors are looking for and much more as well as reduced expenses. Trying to get a fund to let someone come in and poke around at this level would be difficult (the fund would probably argue that you are trying to reverse engineer their strategy). But if its my managed account, the fund would never know and even if the fund did know you could tell them to bugger off.