The DAILY RECKONING hedge fund story IS excellent...
Start a hedge fund.
Warren Buffett says they're risky fads. We say they're risky flim-flams. But there's no denying there's money to be made in them - if you own one.
George Soros added $750,000 million to his fortune last years - thanks to his hedge fund profits. David Tepper, founder of Appaloosa Management, made more than half a billion. Together, the top five hedge funds earned $2.5 billion in 2003, according to Institutional Investor magazine.
So attractive are the profits, that both Wall Street and its equivalent in London, The City, are losing their brightest and best stars. Dinakar Singh and Eric Mindich, for example, are leaving Goldman Sachs to set up their own hedge funds.
The key to making a lot of money by operating a hedge fund - and here, we let you in on an industry secret - is to charge investors a lot of money just for the thrill and prestige of being in a top fund...then, make risky bets. If the fund is lucky enough to actually make money, take a big chunk of the profits yourself. If it loses money, make sure you leave the losses with the gullible investors.
That was Steven Cohen's formula for success. He made $350 million last year, reports The Times of London, by somehow convincing investors to give him 50% of their profits.
It is all too wonderful, as we keep saying. Hedge funds were supposed to be ways to protect your money. Now, like American capitalism and democracy, they have been corrupted and subverted; now they are devices for getting something for nothing.
For the moment, though, no one is complaining. Everyone seems to get rich...not by sweating, but by thinking. Not by making things and selling them at a profit, but by shuffling money around. Let's see, how does it work? Hmmm... We'll take a forward call on the yen and hedge it with a put on oil. (Clients love it when we explain this to them...they think we're so smart.) Then, we'll go long the S&P as a bet on recovery, while shorting the near-term German euro notes for no particular reason at all.
Hey this is fun...just like Las Vegas.
But it may be less wonderful than it appears, at least for the customers. What they are really doing is paying a lot of money to send someone else (the hedge fund managers) to Las Vegas to gamble for them. They send them off - all expenses paid - with a big wad of cash to lose. The investors are happy with a share of the profits and a little handsome tan from the reflected glory. The managers take risky positions knowing that if they win - they'll get a big share of the profits. And if they lose, well...that's the clients' problem.
The wonderfulness of it to the hedge fund operator is obvious. The clients, meanwhile, are like rubes in Hollywood - overjoyed and gaga to be in such smart company. The more the hedge fund manager's make, the more delighted the clients are.
No one other than cranks like Buffett and us bother to ask: Where does all the money come from?
Of course, it comes from the clients themselves. But they're so blinded by the starry glitter of the hedge fund industry they can't see their own pockets being picked.
After all, betting on currencies, bonds, and stock indices is a zero-sum game. "Investors" taken all together cannot come out ahead. For every trade made by one hedge fund, some financial institution - perhaps another hedge fund - must stand on the other side. One must lose every time the other wins.
This is different from real investing. If you put up some money to start a pool hall, for example, you might earn part of the profits of the establishment. No one has to lose so that you get your money. Everyone comes out ahead.
There are times, of course, when almost all seem to win at hedge funds too. Managers might take advantage of interest rate differentials, for example, borrowing in one currency and lending in another. A "carry trade" such as this could last for years. Everyone could make money. A big break in the currency markets could bankrupt them. But, heck, you have to take some chances.
Or, securitized mortgages of sub-prime borrowers might become the latest fashion with the hedge fund managers. As long as long-term rates are on a downward track, the funds make money. And don't worry about a change in the trend; everyone knows the managers are geniuses.
In the meantime, the hedge fund industry has a beautiful game going - clients are happy to pay outrageous fees for outrageous performance. Later, they will realize that they needed every penny of profit to cover the enormous risks they never saw.
Our prediction: Over the long run, the typical hedge fund investor will make zero, minus the huge costs of the hedge fund industry. [Ed. Note : The hedge funds think they've found another way of making something from nothing. They've fallen for the Greenspan trap. Let Richebacher explain how to profit when the boot moves to the other foot: |
