The Hedge Fund Business Is Finished and Bernie Madoff Is Sealing the Deal 20 comments
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Do You Know Where Your Money Is?
On CNBC, Maria Bartaromo asks this question every day on her show, Closing Bell. Well, many investors are asking that same question after the revelation of the $50,000,000,000 heist by Bernie Madoff. Can you even get your mind around that number?
For years, I tried to circumvent mutual fund companies with histories of fraudulent practices. And no matter how methodical my efforts, the industry failed to guard their clients. So I began recommending ETFs, because the fixed structure allowed for minimal manipulation. Yes, Mad Money's Jim Cramer is running for SEC Chairman, and he blames the leveraged ETFs for manipulation. Mr. Cramer, a former hedge fund manager, must have an interesting take on Bernie Madoff.
I have a feeling that hedge fund offices around the world are being inundated with phone calls from people with a need to get up and close with their money. The ramifications of this could mean we are in for that trade we all hoped would never come... 'the capitulation trade'. Would you be able to sleep at night knowing some shill in the Hamptons on a computer may be using some white out to manipulate your investment statement?
The hedge fund business is finished, and Bernie Madoff is sealing the deal. There's nothing like fraud and corruption to put the cherry on the sundae. I know, technically, Madoff didn't run a hedge fund. But is this going to help the unregulated hedge funds, when Madoff, who was regulated, can't be stopped?
I'll suggest a couple of things for investors. Get rid of your mutual funds, and if you're fortunate enough to have hedge funds, liquidate them immediately. It's time to responsibility for your investments, and ETFs can keep you invested. It will minimize the ability for Wall Steet charlatans to abuse their powers.
Think about a portfolio of 40% SPY, 20% QQQQ, 5% GLD, 10% UYG, 5% USO, 20% Cash. It's time personal responsibility takes over, because the bad apples are out of control. Forget about the SEC and the FBI - they don't have enough people to regulate the abusers. Personal ethics are obviously outdated, and trust is the new under-owned commodity.
Disclosure: Author holds a long position in UYG
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This article has 20 comments:
Well imagine the average Joe. If he has a big outsize amout in a unregulated hedge fund, he has to balance greed [of higher and super returns] with worries about the security of the principal. We don't know about super investors and institutions but the average Joe would probably want to pull back some of his hedge fund money? just to sleep well?
I don't disagree that people who rely on the government regulators to watch their back for them are fools, and that simple and transparent balanced holdings are preferable to pigs in pokes, but this is not a plausible way to get to that position.
(It still astounds me that some people blame the free market for brazen and widespread acts of fraud such as the subprime mess, and the unsecured credit default swaps which are the functional equivalents of hot checks being used to play the float. Old-fashioned fraud is not a feature of markets, certainly anything but a feature of capitalism which system requires mutual trust and confidence and fundamentally honest if often hardnosed play by all participants. Even the most draconian regulation only tangentially can address well-concealed or long-standing systematic frauds. The fraudsters as our British friends term them are the appropriate targets for wrath and punishment, not free markets.)
That said many see profit in “freedom” from regulation and call for it. Naïve or corrupt?
On Dec 14 08:15 AM Adamantane wrote:
> Talk about creating a self-fulfilling prophecy. I think it is unconscionably
> irresponsible for anyone to advise people to leap into total panic-mode
> selling, especially when it is a foregone conclusion what the consequence
> will be. It makes me wonder who is setting themselves up to profit
> from the inevitable dead cat bounce after all the lemmings jump off
> the cliff having gotten less than half of what they would have received
> in an orderly and systematic unwinding of positions.
>
> I don't disagree that people who rely on the government regulators
> to watch their back for them are fools, and that simple and transparent
> balanced holdings are preferable to pigs in pokes, but this is not
> a plausible way to get to that position.
>
> (It still astounds me that some people blame the free market for
> brazen and widespread acts of fraud such as the subprime mess, and
> the unsecured credit default swaps which are the functional equivalents
> of hot checks being used to play the float. Old-fashioned fraud is
> not a feature of markets, certainly anything but a feature of capitalism
> which system requires mutual trust and confidence and fundamentally
> honest if often hardnosed play by all participants. Even the most
> draconian regulation only tangentially can address well-concealed
> or long-standing systematic frauds. The fraudsters as our British
> friends term them are the appropriate targets for wrath and punishment,
> not free markets.)
End of the hedge fund business - no. End of the naive investors thinking they can wade into hedge funds withouth advice from an expert - hopefully. People talk about the fund of hedge fund model being broken - in my view, the Madoff situation should go to JUSTIFY the model for the proper fund of hedge funds who do their work to justify their fees.
Explain to me how my fund (FLPSX) went from 42 billion in April 2007 to18 billion in October 2008. There were not that many baby boomer retiring and withdrawing their money during that time.
Lets coin a new word. "Hedge Fund - Mutual Fund"
Maybe Obama will bailout his prestigious supporters, the majority members of the Palm Beach Country Club which probably has a token Republican member, with a tax rebate. After all Obama knows how tough it is having gone to an expensive prep school in Hawaii, Occidental, Columbia and Harvard Law to be a "regular guy". Give me a break.
Another Wall Street ripoff. Apparently "qualified" investors and institutional investors were not very "qualified"!
1) This won't be the death of the hedge fund industry, although it will push further the understanding of the need for real due diligence. Many hedge funds pursue very solid startegies that cannot be accessed with ETF's or any other vehicle. And many of these strategies offer real diversification for a portfolio and real solid upside vis a vis the associated risk.
2) ETF's are a terrific development over the last decade or so. I believe it has been virtually proven that active management in the public securities markets is not worth the fees you have to pay to obtain it. Mutual funds are a legacy from a time when individual investors could not afford the high commissions to buy stocks but mutual munds had much lower effective transaction costs. I was really set up as a transaction cost arbitrage. ETF's get you the same exposure as most mutual funds with much lower cost. Those costs add up to a very meaningful drag on performance over time.
"No, corruption is not a part of “free markets” it is a part of humanity. "
That's why advocates of a genuine free market economic system, which is something vastly different than the system we have been operating under, make it clear that government has one important role in a free market system- to see that those who enter into financial agreements are required to make good on their obligations, and anyone who fails to do so is severely punished.
(The Christmas Song)
WilliamBanzai7
Hedge funds roasting on an open fire
Investors sure to get the hose
Alpha carols being sung by a wealthy choir of the dumb
And regulators dressed up like Eskimos
Everybody knows the hedge fund turkeys and
Madoff's ponzi scheme help to blight the seasons bright
SEC examiners with their eyes all aglow
Will find it hard to sleep tonight
They know that billions of losses are on the way
The markets are loaded with cash cows for slaughter
Its the Wall Street way
And ev'ry wealthy grandmother's
Child is gonna spy to see if
Quants, traders and pinstriped conmen really know how to fly
And so, I'm offering this
Simple phrase to investors from
One to ninety-two
Altho' it's been said many times
Many ways
Merry Redemptions to you
-the risk of online password theft due to viruses, keyloggers, spoof websites, etc.
-the risk of someone at your brokerage stealing your money.
-the risk of the officers at XYZ company being corrupt.
-the risk of the employees at XYZ company being corrupt.
-the risk of any one of the counterparties of XYZ being corrupt.
To add unecessary layers of risk on top of this already formidable stack seems foolhardy. Why add in fund managers, fund of fund managers, traders, hedge-fund conmen, etc? There's no free lunch, but that adage has never dissuaded anyone.
The media will continue to have a field day with Madoff and they should. If these horrible market conditions expose these types of professionals I wish we had a recession every 3 months.
- Richard
Richard Wilson
Hedge Fund Blogger
HedgeFundBlogger.com
Let's face it, most pepople are looking to apportion the blame for the losses of their investment professionals over the past year. Hedge funds always seem to be the first stop. Why then have the biggest frauds been happening inside the regulated vehicles?
The SEC seems to be toothless. The best idea might be for them to start hiring the traders from failed hedge funds and banks to do their investigating work. Try to tell a failed hedge fund trader about your buy and write strategy that makes money every month. He won't believe it for one second. I know be cause I saw enough of those ideas when I ran a prop desk, a bank group and a hedge fund.