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Monday, July 8, 2013

A New Accident That Will Be Waiting to Happen


Regulators Set to Lift Ad Ban on Hedge Funds

SEC Plans to Make It Easier to Solicit Investments in Private Offerings

24/7 Wall Street website:

The world of hedge funds and active management is on the verge of a serious change as far as Joe Public is concerned. The U.S. Securities and Exchange Commission is on the verge of allowing hedge funds to start advertising to the public, but this is after the hedge fund industry’s returns have had lackluster returns against the broader markets. After a recent round was raised by Goldman Sachs for a variation of hedge funds for retail investors, it now seems as though many investment banking firms are preparing to launch similar funds that would be hedge funds for retail investors.

Read more: A Flood Hedge Funds for Individual Investors on the Way - 24/7 Wall St.

Here's what Simon Lack (Lack sat on JPMorgan's investment committee allocating over $1 billion to hedge fund managers and founded the JPMorgan Incubator Funds, two private equity vehicles that take economic stakes in emerging hedge fund managers/. says about hedge funds in his book  about hedge funds:

The dismal truth about hedge funds and how investors can get a greater share of the profits
Shocking but true: if all the money that's ever been invested in hedge funds had been in treasury bills, the results would have been twice as good.
Although hedge fund managers have earned some great fortunes, investors as a group have done quite poorly, particularly in recent years. Plagued by high fees, complex legal structures, poor disclosure, and return chasing, investors confront surprisingly meager results. Drawing on an insider's view of industry growth during the 1990s, a time when hedge fund investors did well in part because there were relatively few of them, The Hedge Fund Mirage chronicles the early days of hedge fund investing before institutions got into the game and goes on to describe the seeding business, a specialized area in which investors provide venture capital-type funding to promising but undiscovered hedge funds. Today's investors need to do better, and this book highlights the many subtle and not-so-subtle ways that the returns and risks are biased in favor of the hedge fund manager, and how investors and allocators can redress the imbalance.
  • The surprising frequency of fraud, highlighted with several examples that the author was able to avoid through solid due diligence, industry contacts, and some luck
  • Why new and emerging hedge fund managers are where generally better returns are to be found, because most capital invested is steered towards apparently safer but less profitable large, established funds rather than smaller managers that evoke the more profitable 1990s
Hedge fund investors have had it hard in recent years, but The Hedge Fund Mirage is here to change that, by turning the tables on conventional wisdom and putting the hedge fund investor back on top.


Some recent news on probably the world's largest hedge fund manager:

Reuters) - A $70 billion portfolio managed by hedge fund titan Ray Dalio's Bridgewater Associates and widely held by many pension funds to survive stormy markets is emerging as a big loser in the recent selloff in global markets.
The Bridgewater All Weather Fund is down roughly 6 percent through this month and down 8 percent for the year, said two people familiar with the fund's performance.
The All Weather Fund is one of two big portfolios managed by Bridgewater and uses a so-called "risk parity" strategy that is supposed to make money for investors if bonds or stocks sell off, though not simultaneously.
It is a popular investment option for many pension funds and has been marketed by Bridgewater and Wall Street banks as way to hedge market turmoil

I never did understand that "risk parity strategy" at least as it was/is practiced by Bridgewater and others  it always seemed to me just a fancy term for taking a leveraged position in other words an accident waiting to happen
Why would you want to do this:(from the article below)
"The basic idea of the strategy is that by equally distributing risks among stocks, bonds and commodities,.." ..

When finance 101 teaches the virtues of combining a mix of bonds and stocks to control the risk of a portfolio because bonds are less risky than stocks


Fashionable 'Risk Parity Funds Hit Hard'

Strategy, Using Leverage to Boost Returns, Hurt by Market Tumult

Investors who piled into "risk parity" funds, which follow a popular strategy that promises to make money in most environments, are being hit hard by the current market turmoil.
The losses are touching a broad swath of investors, ranging from hedge-fund firms Bridgewater Associates LP and AQR Capital Management LLC, to mutual funds and local pension funds.
Risk-parity funds use leverage to try to increase returns on bond investments so they more closely resemble returns of stocks. The basic idea of the strategy is that by equally distributing risks among stocks, bonds and commodities, the portfolio can weather huge price swings without sacrificing returns.

And of course there is the ongoing story of "top trader" Steve Cohen's and his hedge fund


So getting back to the new SEC policy...does anyone seriously expect small individual investors to understand the risks in "fashionable" hedge fund strategies when the largest pension fund managers and wealthiest individuals in the world failed at doing so ? In fact will the retail brokers selling these funds (which will certainly give them higher payout than traditional mutual funds) understand them and actually make sure they are "suitable" investments for their clients ?

At least Registered Investment Advisors like me are at least obligated to make sure they are acting in the clients' best interest. Although the overwhelming evidence shows that it is not an investment that fits those criteria I am certain not all my colleagus will avoid them.

IMO Small Investors + Hedge Funds = accident waiting to happen

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