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Don't Be Scammed by Madoff Investor Sob Stories

"First, only sophisticated investors can invest with hedge funds. A hedge fund is a private investment fund open to a limited range of investors"

This statement is technically incorrect. The SEC only imposes wealth and income thresholds in order to qualify to invest in a hedge fund. You make a huge leap of faith in assuming that wealth and income equals sophistication, and therefore entitles them to less protection from outright fraud. The majority of high net worth individuals who have amassed wealth generally have done so in non-Wall St professions (i.e., small business owners), so I do not believe that wealth translates to sophistication.

"Such a fund is less regulated and allowed to undertake a wider range of activities than other investment funds"

Again, technically incorrect. It is the fact that hedge funds do not REGISTER with the SEC that allows them to undertake a wider range of activities than other investment funds (derivatives, futures, short selling, etc). They forgo registration, are permitted to use the additional tools, and agree to limit the way they can market and accept limitations on the total number of investors they can take. These are simple trade offs, the motivation of which is not intended to shirk regulation, but to increase investment flexibility. I am so tired of this misconception that hedge funds are not regulated, or are less regulated. If a hedge fund manager breaks securities laws, he goes to jail, just like a mutual fund manager. The level of regulation is not a material difference, and is totally overplayed by sensational journalism.

Is It Time to Short Bonds?

Everyone is talking about this trade lately (long TBT). The long term reasoning is sound, in terms of the 30yr Treasury yields needing to rise eventually to compensate for the US gov printing presses working 24/7. However, the short term (flight to quality) trend may persist longer than anyone knows. Another way to play the inflation trend is via diversified commodity vehicles such RJI or DBC. The dollar does not need to weaken for commodities to rise, but it would certainly be a tailwind.

Economic Crisis: Good Luck Europe, You'll Need It

Great article. An aggressive way to trade this weakening euro theme is by buying DRR (FD: I'm long as of yesterday). My belief is that the $/Euro level goes back to parity, or 1.0 (down from the current 1.27 level), DRR should theoretically provide 2x this % move, or 2 x 21.25% = 42.50%. I think this happens by year end.

Seeking Alpha has a good currency ETF/ETN guide:
seekingalpha.com/artic...

Where's the SPAC Attack?

This is an interesting article, but I would suggest the author dig a bit deeper into what it means for current investors who buy publicly traded SPACs today. Would also suggest a list of them, and their current discounts to liquidation value. They are almost all trading at a risk/time discount to their redemption/liquidation value. If no deal is consummated, this discount will have closed, and the investor will have received the return associated with this time frame, and risk taken. It is somewhat analogous to risk arbitrage in terms of the way the spread trades.

Each SPAC is different, carries unique risks, and should be researched thoroughly before investing. As an example, you buy a SPAC at $9, no deal is announced over 12 months, you receive your liquidation value of $10. This $1 dollar equals an 11.1% annual return, just for waiting it out. This is an oversimplification, but it is more or less the reason hedge funds with longer time frame lock-ups are investing in these SPACS today, and they are likely applying 2-3x leverage to juice returns. They are in fact betting that no deals are announced, and that cash is returned to investors. Hedge fund are more or less capitalizing on this illiquidity premium associated with the SPAC. They are buying them from market participants with weaker long-term financing mechanisms.

Tough Outlook for Commodity Indexes

"Based on current prices, the fund is 21.56% annualized headwind over the next year. That means that, even if commodity prices stabilize, this index will decline by more than 20% over the next year if the contango situation holds."


I don't believe you can simply add these up and call it a 21.56% annual headwind. You should calculate a weighted average number for each commodity, based on its % weight in the fund (i.e., 35% x 13.15% +20% x 3.49%..etc). So this 'headwind' would be much lower, somewhere under 6% just eye-balling the math.

Apologize if I'm missing something based on your methodology..thanks for the insightful way of thinking about this extra headwind though..

Did the End of the Investment Banks Cause the Latest Sell-Off?

Hedge funds that use leverage (not all do, i.e., distressed HFs) are de-leveraging because they have no choice: not only are redemptions streaming in ahead of 12/31 exit points, all prime brokers are scaling back the amount of financing they can/will provide in the new investment bank regime that is unfolding.

This has impacted a number of markets, but what has become particularly interesting due to this massive de-leveraging are convertible bonds. Do your own research (type the word convertible in the Yahoo quote box), there are closed end funds and mutual funds out there that currently yield 10-20%, due, in my opinion, to convertible bond arbitrage (CBA) players being forced out of the game, in wholesale fashion.

CBA is (was) a heavily leveraged strategy (5-10x), reliant upon prime broker provided leverage. CBA happens to be the worst hedge fund strategy on the basis of performance YTD (HFR data), with both Sep and Oct being record disastrous months. Some funds are down 50%+ in just these 2 months alone. Citadel has been in the press refuting solvency rumors, likely relating to their convert exposure. They probably started buying a little too early in the selloff is my guess.

I do not believe these terrible CBA HF returns are a coincidence, and they have been greatly exacerbated by the changes taking place in the prime brokerage industry. There is no where else to obtain financing. The only bids out there for converts are long-only, non-leveraged participants, and they simply don't have the cash to absorb the sudden avalanche of forced convertible bond selling (as the arbs unwind, they sell the bonds and buy the stock back).

Buying converts seems like one of the more compelling risk-adjusted trades out there at the moment. They appear to be offering equity like returns, with bond like risk. Yes, they are subject to the economic troubles we are facing, and default risk is real, but equities are even riskier as they can go to zero. Why would a risk-averse investor buy stocks until this other market opportunity goes away? Downside protection is provided by the bond floor inherent in the convert, and they participate in upside market rallies due to the embedded call option they contain (they can be converted into stock, although the delta on them is now very low). The big risk seems to be further de-leveraging, so approach with caution and size your position accordingly.

Barron's finally picked up on this on Sunday, and has a full article on converts, but they barely scratched the surface on what's really going on.

online.barrons.com/art...