Unstructured Finance

Hedge funds vs. darts

By Matthew Goldstein

The Wall Street Journal used to run a feature in which some of its staffers would periodically pick stocks by throwing darts against a target. The idea was to see how many times stock picking by pure chance could outperform the picks of a bunch of experts.

The WSJ ended the popular feature several years ago but maybe it’s time from someone to bring it back and this time use darts to try to outperform some of top hedge funds managers. That’s because with the average hedge fund up about 1.2% during the first-half of the year, it would seem an investor on his or her own could do just as well picking stocks blindfolded.

Indeed, with the S&P500 up about 8 percent for the first half, the 3.7% gain for David Einhorn’s Greenlight Capital and the 3.9% gain for Dan Loeb’s Third Point don’t look so robust on second glance.

Sure, Einhorn and Loeb are beating a lot of their peers. And they are certainly doing better than John Paulson, who is well on his way to another losing year in his biggest fund. But for all the ink we in the media spill on hedge fund managers, you’d think more would be knocking it out of the park. (Sorry, David your 3rd place finish in the World Series of Poker was great but doesn’t count).

Now to be fair, hedge fund managers don’t just buy stocks like mutual funds. They also short them and buy plenty of other securities. In theory, hedge fund managers aren’t supposed to “kill it” with outsized performance in a given year, but “kill it” by making money for their investors in both good and bad market environments.

So if a manager is up about 4 percent for the year—after those hefty fees–one could argue the managers are doing what they are supposed to.

The Wall Street Journal used to run a feature in which some of its staffers would periodically pick stocks by throwing darts against a target. The ideas was to see how many times stock picking by pure chance could outperform the picks of a bunch of experts. Join Discussion

UF Weekend Reads

A dreary looking day in the NYC environs today, but that won’t overshadow birthday celebrations and other good news too cheer! A big shout to all UF members today. Oh, and fight for your right to party. Here then is Sam Forgione’s suggested readings.

 

From The New York Times:

A former managing director of Bain Capital has a telling beef with art-history majors.

From AR:

Hedge fund managers are still leaving their safety zones for emerging markets, even as John Paulson is recovering from his Sino-Forest bet, writes Jan Alexander.

From The Washington Post:

A dreary looking day in the NYC environs today, but that won't overshadow birthday celebrations and other good news too cheer! A big shout to all UF members today. Oh, and fight for your right to party. Here then is Sam Forgione's suggested readings. Join Discussion

The confession season

By Matthew Goldstein and Jennifer Ablan

The year is not yet over and already the confessions are starting to roll in from some of the biggest U.S. money managers.

Bill Gross, manager of the world’s biggest bond fund, sent out a “mea culpa” letter late Friday to his many mom-and-pop investors, saying he’s sorry for putting up such bad numbers this year. Mea culpas from Pimco’s guiding light and the self-styled “bond king” are rare, largely because his Total Return Fund has long been one of the industry’s top performers.

But this year has been a tough one for Gross, who guessed wrong by betting heavily against U.S. Treasuries, which have turned out to be one of the biggest out-performers of 2011. The fixed income guru, who helps manage more than $1.2 trillion at Pimco, wasn’t farsighted enough to foresee a flight to Treasuries prompted by events like the European debt crisis, the battle over the U.S. debt ceiling and the general anemic state of the global economy.

Gross positioned his firm’s flagship fund for modest economic growth and that move left him putting up a “stinker,” as he says in his letter (hat tip to Dealbreaker.com). So, as things stand right now, the Pimco TRF fund with $242 billion in assets, is up only 1.06 percent year to date, compared to 3.99 percent gain for the benchmark BarCap U.S. Aggregate Index.

As we’ve reported, Gross now has repositioned his mammoth fund for zero economic growth. He’s levering up to buy longer-dated bonds with higher-yields and betting that a weak economy will keep interest rates low for a good long while. The way things are going that would seem to make sense. But as we know in the markets, timing is everything.

Gross wasn’t the only big name investor who had to eat some crow last week. John Paulson, the famed hedge fund manager, in a conference call with investors on Oct. 18 acknowledged that his big stock bets on a economic recovery in the U.S. haven’t panned out. He told his wealthy flock he needs to do a better job hedging exposure in the future.

The year is not yet over and already the confessions are starting to roll-in from some of the biggest U.S. money managers. But where are the confessionals from Wall Street bankers. Join Discussion

Welcome to Paulson-mart

By Matthew Goldstein

It’s been an ugly summer for hedge fund king John Paulson with two of his biggest funds down more than 25 percent. But what makes that poor performance all the more painful is how widespread it is being felt by wealthy individual investors around the globe.

Paulson’s flagship Advantage funds would appear to be exclusive terrain with a $10 million investment requirement. But that hefty entrance fee is something of a veneer because many of Paulson’s investors have gained entrance to his kingdom by plunking down as little as $100,000. That’s because Paulson’s Advantage funds are some of the most widely sold hedge fund portfolios on distribution platforms maintained by Wall Street firms, European banks and small investment advisory firms around the globe.

Paulson has built a powerful internal marketing force to make sure there is a steady stream of money from wealthy individual investors trying to get into his funds. This was one of the more surprising things my colleagues Jennifer Ablan, Svea Herbst-Bayliss and I found when we began taking a close look at Paulson’s problems this year.

Now there’s nothing wrong with a successful manager taking maximum advantage of so-called hedge fund platforms to rake in money from rich individual investors. One could even say it’s smart because it enables a manager to take advantage of Wall Street brokers to help sell his funds and create pent-up demand at the velvet rope line.

But these distribution channels, which more and more managers are looking to join, are also a away for hedge funds to get around securities rules that theoretically limit the number of investors that can go into anyone portfolio. Typically, the investment with a hedge fund is listed in the name of a brokerage on behalf of all its customers who commit money to a manager. So if UBS, which has an agreement to sell Paulson’s Advantage funds, takes in money from 1,000 of its wealthy clients, that would be officially listed as a single Paulson investor.

This one reason hedge fund investing has become a lot more common than it used to be. Sure, you have to be rich to still get into one of these distribution channels, but sometimes a person can be investor in a hedge fund simply because a broker with discretionary authority thinks it’s the smart thing to do.

It's been an ugly summer for hedge fund king John Paulson with two of his biggest funds down more than 25 percent. But what makes that poor performance all the more painful is how widespread it is being felt by wealthy individual investors around the globe. Join Discussion