The Commodities Hedge Fund Flap

Metal Bulletin this week runs 1850-or-so elegantly arranged pearls, assembled by yours truly under an assumed name, on the general theme of commodity hedge funds, their beatings in August and year-to-date, and what it might mean for their future.

It probably seemed a good idea at the time, but naming a commodity hedge fund after a solitary bird of prey turned out to be new proof of the old adage that birds of a feather flock together.

Ospraies and Red Kites were not alone in being savagely plucked by summer’s turmoil in the stock and commodity markets, but their spectacular losses set off a rather louder-than-usual dawn chorus of squawks and screeches...

Flight or Fail
by Greg Newton
Metal Bulletin Sep. 22 2008

Disclosure: NakedShorts, again under an assumed name, headed the US businesses of Metal Bulletin plc [RIP] from 1987-2004.

Comments

[User 232593:]

i asked a # of times on different sites that except for the wealthy looking for more wealth what good are hedgefunds? i know the owners & managers cant lose but i dont know why no ones explains.

2008 Sep 26 04:22 PM

[irondoor91:]

Answer to User 232593: Forget the word "hedge fund". The concept of a mutual fund that invests in the common stock of multiple companies has been around for decades. There are thousands of them. Check out the returns of stock mutual funds for the past 10 years. After taxes, they have earned generally less than the inflation rate. 80% of them can't even beat an S&P index fund, but they still get to charge more than 1% on total assets. They hold trillion of dollars worth of stocks and they dwarf hedge funds. Same for bond funds. Same for money market funds (which actuall serve a useful purpose these days as a convenient way to buy t-bills).

Take the concept of the mutual fund a step further. Allow the fund manager to purchase, sell and short any publicly traded stock, bond, ETF and to also buy mutual funds as well, if he wants. Wrap the concept in a limited partnership that is privately owned, where the manager has most of his personal net worth invested alongside his partners. The investors must be "sophisticated" and have a minimum net worth. They can receive daily reports on partnership holdings, gains and losses, performance and any other information that they want to demand.

For this flexibility, they are willing to pay the manager a few basis points more to cover his higher overhead compared to a mutual fund, since the partnership will by design hold much smaller level of assets than a mutual fund. In addition, the partners are willing to share a percentage of the profits earned with the manager.

What's the problem with this arrangement? It seems much more personal and under the control of investors than that of a mutual fund run by a faceless manager that an investor will never see or speak to.

But why would anyone want to, given their miserable investment track record.

I will ask you the same question. What good are mutual funds that charge high fees but can't beat the market? Those fund mangers will continue to earn very high salaries, benefit and perks even though their funds have lost billions of dollars in the past year (and will continue to lose as long as we are in a bear market).

2008 Sep 26 05:45 PM