Hi DJ, Now that you are rested, welcome back to our doom and gloom party. I am sure the thread, like I, missed John Shannon and your goodself.
On positioning, I have hedged a quarter of my income for the next six months at Euro 0.95, and I am keeping my earlier established Euro/CHF long positions until and unless something blows up. I am still refusing to contemplating buying anything other than taste testing some distressed bonds. Even those morsels of taste testing (Global Crossing bonds) resulted in a mess on my lap (bought GX bond at 0.7, and watched it go to 0.61 within days). I am situated thus ...
Message 16266917
... and up by 6.x% for the year, thanks to interest and rental yields. No brilliance and boring to the max, wanting a crashing-ly good cleansing to energize my pulse rate, and to clear the way for all the bankruptcies that ought to be, so that we can move on to better and more productive actions.
During a taxi ride last night, my wife asked me what we ought to invest in. I told her, "I do not know, but I am sure there will be plenty of goodies coming up". She, "don't know about stocks and bonds enough to say ... how about Shanghai property for the long term ... maybe just land somewhere, but not Hawaii". I, "why not just cash, because the implosions are just getting started?", because I was thinking no way for Shanghai property, but do not mind Hawaii land.
The atmosphere in HK is coloring my mood dark purple ...
Message 16243010
Here was an recent excursion to another theme fitting our generalized script for the collapse ...
Message 16271759
Message 16272046
Message 16272397
Message 16272452
Message 16273140
Message 16273174
Message 16276787
Message 16277128
Message 16277301
Message 16267873
and then back on topic of systemic failure and non-linear response ...
Message 16262723
I know you do not care for clippings, but, none the less, anyway, here is a clip on a developing but old abracadabra ...
economist.com
QUOTE
Hedge funds
The latest bubble?
Sep 1st 2001 | NEW YORK
From The Economist print edition
Even if it proves not to be a bubble, the craze for hedge funds is destined to leave many investors disappointed
Get article background
NEVER have hedge funds been more popular. In the first half of this year, almost twice as much money flowed into them as in the whole of 2000. Worldwide, there are now reckoned to be over 6,000 such funds, controlling assets worth over $500 billion.
Hedge funds were not so long ago the preserve of a wealthy few. Now everybody wants to get into them, from institutional investors to the “mass affluent”: individuals with as little as $10,000 to punt. In Belgium, hedge funds are advertised on television. In America, where such advertising is banned, hedge funds are still keenly marketed in private, in seminars given by stockbrokers and private banks. To be a hedge-fund manager has cachet.
Is this boom in hedge funds a good thing? Some people reckon that the industry is simply coming of age: it is growing more sophisticated as it acquires a track record that looks more appealing to investors each time that other asset classes—from shares to venture capital—suffer yet another fall. And for all the rapid growth in hedge funds, the scope for more remains. Only one in five “high net-worth” individuals now invests in any form of private equity (which includes venture capital as well as hedge funds). Moreover, it is claimed, both investment quality and risk controls are improving fast.
Others are more sceptical. They point to the many hedge funds of doubtful quality, with inexperienced managers or even charlatans at the helm. Funds are being pushed on investors who do not understand the risks. Anyway, they are hard to monitor and vulnerable to fraud. With performance fees for hedge-fund managers typically soaking up 20% of any annual increase in value, incentives tilt in the direction of excessive risk-taking. (There is usually no penalty should a fund’s value fall, and a manager can always wind down his fund and start again.) And as more money goes into hedge funds, it chases a dwindling pool of truly talented managers and sound investment opportunities.
The party-poopers are led by Barton Biggs of Morgan Stanley, a veteran investment strategist and bubble-spotter. “The hedge-fund mania” in both America and Europe, he says, bears all the signs of a classic bubble: “I am sure that many new funds will explode, and their investors will lose a lot of money.” This analysis has not pleased some of his colleagues at Morgan Stanley, which is equalled only by Goldman Sachs in its enthusiasm for hedge funds, touting “opportunities” to wealthy customers and supplying “prime brokerage” services to funds. Paul Roye, director of the investment-management division at the Securities and Exchange Commission, advises investors to “be cautious about the hedge-fund craze”.
Is there really a bubble in hedge funds? Certainly, a lot of investors have looked at hedge funds only because they are the latest fad. Also, investors tend to chase the best past performers rather than to question whether previous success says anything about future prospects.
Consider “merger-arbitrage” funds, which bet on movements in the share prices of firms that have announced mergers but not yet completed them. According to Meredith Jones of Van Hedge Funds, a research group, these funds shone last year, generating gains of as much as 17.1%. They have since attracted much fresh money. Yet this year they are up only 4.9%. Many funds lost a packet betting on the merger of GE and Honeywell that European regulators eventually blocked. Now, a lot of new money is chasing funds with a three-year track record, average annual returns of 12-15%, and low volatility: meaning fewer than 250 out of the 6,000 hedge funds, according to Ms Jones.
There are so many different sorts of hedge fund that it is hard to talk seriously about a generalised bubble. For a start, around half of all hedge funds are “long-short equity” investors—just like the original hedge fund, formed in 1949 by Alfred Winslow Jones, who sought to reduce risk by owning some shares while short-selling others. There is no shortage of equities for long-short funds to bet on, and the amounts invested by hedge funds are dwarfed by equity mutual funds. Thus, says Nicola Meaden of Tremont/TASS, a research firm, there is no need to worry about the flood of new money causing a bubble in the underlying assets.
This may not be so true for “relative value” hedge funds, which try to arbitrage away differences in the prices of two assets that have essentially identical economic characteristics—a Treasury bond with 30 years to maturity, for instance, against one that matures in 29 years. Here, the hedge funds gain by correcting the mispricing of assets. But there is a limit to the gains from this form of arbitrage. According to Will Goetzmann, an economist at Yale, a broadly fixed amount of dollars is available from the strategy, rather than a fixed rate of return. More money flowing into the strategy will mostly reduce the average rate of return to investors. And to compensate for smaller average returns, funds may be tempted to multiply their stake by borrowing more money, increasing their risk.
The inflationary impact of fresh demand is cut a bit because plenty of established hedge funds have closed their doors to new investors. Eventually, however, many hedge funds succumb to the temptation of growing too big. At that point, they find it harder to invest money without the rest of the market turning against their positions. And they often suffer managerial problems as their staff expands. Either way, returns fall.
Much new money flowing into hedge funds, particularly from pension funds, is coming with demands attached—notably for greater transparency, and for evidence that risks are well managed. There is also growing interest in more rigorous performance analysis, including that relative to benchmark indices (see article). If returns disappoint, there may be growing pressure to cut fees—which would be a sure signal that the industry is maturing. At present, some charges are actually rising: there are funds with performance fees of 50%, which smacks of bubbledom.
Bubble or no, there is every chance that hedge funds will perform less well in future than in the recent past. Indeed, although it is taken on trust that hedge funds outperform in a bear market, there is little evidence for this. Hedge funds did so poorly during the bear market of the 1970s, with many going out of business, that the great Winslow Jones himself was moved to observe that “the hedge fund doesn’t have a terrific future”.
UNQUOTE |
