Staring into the Abyss (Or Why Europe is Hosed)

The situation in Europe is getting worse than ever but stock markets around the world are shrugging this off. The debt super-cycle has reached a point in Europe where there are no good solutions. Austerity measures to cut budget deficits will back fire because they will cause the European economy and tax revenues to fall faster than the savings that they produce. Allowing countries to default on their debt will ripple through the European banking system and cause banks which are already teetering on the edge of insolvency to go bust. Devaluation or essentially default by inflation also does not work because of the common currency. Sure it will make all of Europe more competitive against the rest of the world but glaring trade imbalances internally will remain as German exports will get cheaper to the same degree as exports from the periphery. They only way to adjust these imbalances with a common currency is for laborers in the periphery to take massive pay cuts (like this will ever happen voluntarily.)

Soon Greece will be front page news again as they try to persuade hedge funds and other private investors to take a “voluntary” 50% hair cut to avoid triggering credit default swaps. If you are a hedge fund manager, why would you ever voluntarily agree to do this? You can hold out and if everyone else agrees to take a hair cut Greece will be in a better position to pay you and you will make out like a bandit, getting paid at par. If nobody else agrees to the hair cuts, Greece will default and trigger the credit default swaps that you bought (you did buy CDS didn’t you) and you will get paid at par. The alternative is that you are the whipping boy and you “voluntarily” take a haircut while the ECB, IMF and other favored entities are paid off at par and end up laughing all the way to the bank.

So with all of this going on: how do Greece and the rest of Europe avoid a financial implosion?

You really owe it to yourself to read the full piece by John Mauldin.

Largest Hedge Funds

The Largest Hedge Funds in the World

Who are the largest hedge funds in the world? Recent market turmoil has rearranged the list, but a few top hedge fund managers with famous names like Soros, Dalio and Paulson still top the list.

Bridgewater Associates Hedge Fund

At $59 billion, Bridgewater Associates is the largest hedge fund in the world. But it wasn’t always so big. Just a brief ten years ago, it was scraping by on a relatively paltry $2 billion in assets under management, but this last decade has been one of staggering growth in AUM. How did it attract so much capital? First it performed really well. Ray Dalio got things right in 2008 and did really well when other large hedge funds stumbled. Great performance lead to a huge influx of assets and of course compound growth in AUM didn’t hurt either. Bridgewater was founded by Dalio all the way back in 1975 and it wasn’t until 1987 that is amassed $5 million in assets. From that $5 million, it took nearly 15 years for it to reach $2 billion in AUM in 2002. Then the trip from $2 billion to $59 billion took a brief 9 years. Will the Bridgewater hedge fund keep growing at an exponential rate? Only time will tell. Most of the time when hedge funds get larger their performance tends to suffer. But if anyone can beat the odds, Ray Dalio is as good of a bet of any.

JPMorgan Asset Management

The good folks at JPMorgan have $54 billion under management in their hedge fund division. This is quite a stunning figure and makes them one of the largest hedge funds on the planet. But it still pales in comparison to the size of the rest of the firm. JPMorgan has one of the biggest balance sheets in the world. It has assets of $2.3 trillion (this is trillion, not billion!) and a derivative exposure of $90 trillion. When put in this context $54 billion doesn’t seem like as big of a deal as it really is. In fact, JPMorgan’s entire asset management division oversees a total of $1.3 trillion, which is a vast sum of money.

Man Investments

$40.6 billion is the size of Man Investments assets under management. Man Investments is controlled by Man Group, which has quite an illustrious history. Man Group was started by a barrel maker named James Man, all the way back in 1783 so it is more than 200 years old. Back then, Man won a contract to supply the Royal Navy with rum and he made a lot of money doing this, because in those days every sailor was entitled to a ration of a half pint of rum per day. From rum, Man moved into trading and brokering commodities and then into trading financial contracts and finally into hedge funds and growing its business into one of the largest hedge funds in the world. Overall, Man has made a number of great moves in the financial markets, but one of its slipups was investing $360 million dollars of its client’s money into Bernard Madoff’s ponzi scheme/hedge fund.

Paulson & Co Hedge Fund

Paulson used to run a much larger hedge fund, but after a disastrous 2011, in which his main fund the Advantage Plus lost more than 50%, bringing his assets under management down to $36 billion and moving him lower on the list of the biggest hedge funds. Paulson’s hedge fund really shined in 2008 when his wagers against subprime paid off handsomely, though a lot of credit probably should go to Paolo Pellegrini for keying him onto this trade. But in 2011, what killed his assets under management were bad trades betting on a rebound in financial stocks, gold and of course Sino-Forest. Will the Paulson hedge fund regain spots on this list of largest hedge funds? It’s hard to tell but the odds are stacked against him. To regain its former glory after a 50% loss, his hedge fund will need to stage a 100% gain.

Brevan Howard

Brevan Howard runs $32 billion in hedge fund money, which is not bad for a firm that was started only a decade ago in 2002. In 2008, their hedge fund had a 20% return in a year when most funds were down double digits. And it staged a repeat performance in 2009 turning in an 18% return.

Soros Fund Management

Even though hedge fund manager George Soros closed his fund to outside investors he still manages a massive $28 billion in his hedge funds. So even without outside money he still has one of the largest hedge funds anywhere. Soros started Quantum Fund back in the 1970s with analyst extraordinaire and investment biker Jim Rogers. In the 70s and 80s Quantum Fund was the top performing hedge fund in the world and attracted a lot of money. It made so much money that Rogers retired from managing money and spent a number of years traveling around the world. But Soros kept on running money and virtually all of the money his firm manages is his own and that of his family.

308 Million Americans are getting hosed

SurlyTrader: A Bull Trap?

Bullish sentiment is rising, the VIX is falling; a bull trap could be forming. The scenario: a marginal new high and all the longs and under invested hedge fund managers start buying heavily and the shorts abandon ship. Then when everyone is long, a massive sell off ensues. Everyone is aware of the inverse head and shoulders and the resistance at 1292 and when everyone is aware of something, it rarely works as it should. Tensions in Iran could goose the price of oil, but what could result in lower oil prices? The only thing that comes to mind is a global recession. So if oil prices keep rising how does that affect earnings and of course stocks?

Doug Kass is Bullish

Big surprise, but he was largely right of 2011 being a flat year so let’s give him a little benefit of the doubt. What is one of the reasons for his bullishness? Important market participants like hedge funds and other big investors are underinvested (at least according to him) so they will feel compelled to buy. But with all the iceberg risk lurking under the surface are hedge funds really underinvested or are the positioned properly for the fat tails and black swans that are still lurking in 2012?

Mish: Greece struggling to buy Aspirin, but no problem buying tanks and submarines

Good to see that the Greeks have their priorities right.

Charles Hugh Smith: Health is the True Wealth and How Doctors Choose to Die

Treating chronic illness is much more profitable than promoting simple lifestyle choices that prevent illness. Perhaps that is why so much is spent on sickcare instead of preventative healthcare. Health is the true wealth because without health, wealth cannot be enjoyed for long. Everyone dies (this includes doctors too), but not everyone truly lives. What do doctors do when they are dying? They know about the latest medical treatments and they generally have good access to these treatments. So why do many doctors not take advantage of them and instead focus on spending more time with their families as their time draws near?

Simon Black: 308M Americans are getting hosed

Your banker is being forced by the government to spy on you. In the world of financial transactions, instead of innocent until proven guilty, you are guilty unless proven innocent and your assets could be completely frozen even if you are innocent. So you’d have no way to hire a lawyer to defend yourself against false accusations. What is your backup plan?

Mish: The Pink Elephant in the Room

Exponential population growth meets limited resources. Will technology save the day? Will population growth slow down into a soft landing? Or will something much more sinister, like a population overshoot, happen?

Mish: Iran not developing nukes?

At least that’s what Defense Secretary Panetta says.

Mauldin: Shilling’s Forecasts in One Word

Deleveraging

Bob Januah: Nothing’s Changed

Too much debt; only action by policy makers is to print more and borrow more; the eurozone is still doomed; expect QE3; growth is slowing despite fleeting countertrend spikes; still targeting S&P at 800.

Middleton: An Inferior Educational System is What Ails Us

After channeling Du Bois, Middleton describes what is wrong with the American educational system and posits a few thoughts on how to fix things. It is a very long read and will get much longer as this is only the first part of a multi-part treatise.

Charles Hugh Smith: Preparing for the End of the Central State

The central state and other large institutions are topping out, local post offices are being shut down and even Walmart is hitting the peak of its growth curve. Depending on a strategy of begging for central state funding of local initiatives is doomed to failure as central states are on the wrong end of the S-curve. The solution is localism.

Hedge Fund Hub Daily Reading: No Place to Hide

Greg Simmons and Matt Davio: No Place to Hide

All correlations have gone to one. There is no place for hedge fund managers to hide. Zero rates and baby boomers not going to come back and invest in stocks or real estate. It’s never been this hard to make money trading. The new normal is a lack of normal and will be with us for a long time.

Stansberry Radio: 10% is enough for God, so 20% should be enough for the government

“It’s much better to sell investment advice than take it.” Stansberry: the US needs a balanced budget amendment, sound money and limits to taxation. Citizens should have an affirmative right to keep 80% of their income and this should be written into constitution. A 10% tithe is enough for God, so the government should be content with taking a maximum of 20%. The unemployment rate for returning veterans is approaching 30%. This is not good.

Malcom Gladwell: Late bloomers

Late bloomers require experimentation and life experience to perfect their craft. In the beginning they look the same as non-bloomers, but what separates them is persistence. Hedge funds resemble early bloomers, they have to perform each quarter or they lose their investors. So there are no late bloomers in the hedge fund world.

John Mauldin via The Big Picture: Path Dependency and the Debt Supercycle

Path dependency is when you go down a one way road and there is no turning back. One example is having a baby, when you are 8.5 months pregnant there is no turning back to not having a baby. That is path dependency. Another example has to do with debt, once you buy a home you have to make mortgage payments. If your mortgage is underwater, you probably can’t sell the home or your choices are to keep paying the mortgage or walk away. This is also path dependency. The nations of the world have borrowed so much money that in many cases there is no turning back. The choices will be defaulting on the debt or printing more currency and debauching their currency. Essentially the choice is between a short swift recession or a long and drawn out depression. Neither is very appealing.

Ritholtz: How to be a good forecaster

Forecasters suck. Most forecasts are wrong. Always couch your forecasts in probabilities that way you are always right no matter what happens. Avoid making forecasts whenever possible.

Jim Quinn: The Year of Living Dangerously

Making predictions is tough, but when the planets line up, something is bound to happen. Debt, civic decay and global disorder, these are the things to watch out for in 2012. Hedge fund managers that are on the ball are going to thrive on the volatility in 2012, but those that fall asleep at the wheel are going to suffer.

Debt

Debt to GDP of 90% is the point of no return and almost all developed counties have exceeded this level, and the off balance sheet entitlement promises are four to six times greater than the official numbers.

“Those who remain unconvinced that rising debt levels pose a risk to growth should ask themselves why, historically, levels of debt of more than 90 percent of GDP are relatively rare and those exceeding 120 percent are extremely rare. Is it because generations of politicians failed to realize that they could have kept spending without risk?” Rogoff & Reinhart

Civic Decay

Occupy Wall Street is only the beginning. The middle class is being wiped out. Is having 15% of the population on food stamps a sign of recovery? 50% of American workers don’t pay federal income tax, but 50% of American workers make less than 25K per year. They still face numerous state and city taxes and fees as it gets harder to put food on the table, tempers flare.

Global Disorder

Inflation is exported from the developed world as money is printed and more debt is issued to continue running trade deficits. Food prices continue to rise and the poor of the developing world struggle to feed their families. Food riots ensue. Despite a global slow down, oil prices continue to remain high as oil production rates are falling. Since the developed economies of the world run on oil, tensions over oil supplies rise to a boiling point.

Minyanville: Even a Rich Kid can join the 99%

The times are a changing.

Mish: If I could turn back time…

Time traveling with Ron Paul: what if we could redo the last eight years with Ron Paul as president? There would be no Fed. The US would have saved $1T in Iraq. US citizens would pay less in taxes and keep more of the money that they worked for. The US would not be spending billions imprisoning non-violent drug users.

Charles Hugh Smith: The Real Reason WWII Ended the Great Depression

How WWII ended the Great Depression and why current policies are doing the exact opposite.

Hedge Funds for Dummies

Hedge Funds for Dummies is a book about hedge funds. Now that’s a shocker. But it really isn’t just for dummies it’s for anyone (including smart people, like you) who want to know more about the complex world of hedge funds. It was written by Ann Logue and attempts to address the key questions that you might have about hedge funds.

It starts by addressing the age old question: “What is a hedge fund?” And it progressively delves deeper and deeper into some of the other questions that you might have about these secretive investment vehicles, like whether hedge funds are right for you and how to set up the right hedge fund investment strategy. It even covers how to perform due diligence on a potential investment and hiring a consultant to choose the right hedge funds for your personal circumstances.

So what is a hedge fund?

A hedge fund is a lightly regulated investment that is managed by a financial professional known as a hedge fund manager that invests or even trades in a diverse set of securities in an attempt to generate higher returns with less risk.

What sets hedge funds apart from mutual funds?

The primary difference between hedge funds and mutual funds has to do with regulation. Hedge funds are more lightly regulated than mutual funds and so regulators generally require that they are only offered to sophisticated accredited investors only.

Another big difference is in fund manager compensation. Hedge fund managers are compensated with a performance fee that is based on how well their funds perform. While mutual fund managers are only compensated on the size of their assets under management. This gives hedge fund managers a greater incentive to generate higher returns than mutual fund managers.

What is good about Hedge Funds for Dummies?

The best part of this book is that it delves a little deeper into hedge fund topics that really matter. For instance, it covers hedge fund due diligence. This is an absolutely critical aspect of hedge fund investing. If your due diligence is weak, you may find yourself a victim of a fraudster like Bernard Madoff. Obviously, no one wants that. So pay close attention to the chapter on hedge fund due diligence.

Another good part of this book focuses on evaluating hedge fund contracts. You should have a good understanding of all the terms and clauses in any contract that you sign. You should have a good grasp on lockup provisions, sidecar clauses and other contractual provisions that could be harmful to your interests as a hedge fund investor. A close reading of all hedge fund contracts and an understanding of their clauses is critical to protecting your investment capital.

All in all, Hedge Funds for Dummies is a good book to learn more about hedge funds even if you aren’t a dummy.

Renaissance Technologies

Renaissance Technologies is an odd name for a hedge fund management company. But what it lacks in a name, it makes up in performance. In fact, its Medallion Fund has performed so well that Jim Simons returned all outside investor capital and manages the fund purely for himself and the employees of his firm. It is one of the best performing hedge funds of all time and if Simons had as many years to compound as Warren Buffett, I would wager that he would easily surpass Carlos Slim as the world’s richest man.

Medallion Fund

The Medallion Fund is the flagship hedge fund of Renaissance Technologies; it uses sophisticated quantitative algorithms and the latest in computer hardware to detect fleeting anomalies in the financial markets of the world and profit from them ahead of anyone else. It trades almost every financial asset under the sun and in fact the sun never sets on its portfolio because it is active in almost all of the world’s financial markets.

Simons’ Medallion Hedge Fund uses exceptionally complex mathematical models to predict future price changes in liquid financial instruments. Its computers suck in an enormous quantity of time series data and through complex mathematical transformations these computers filter out the noise and look for non-stochastic price movements that can be predicted in advance.

Now you might think that George Soros’ Quantum Fund was the top dog in the 1990s, but Renaissance Technologies’ Hedge Fund blew him out of the water. For the eleven years ending in 1999 the Medallion Fund returned a staggering 2,478% compared to Soros’ relatively paltry 1,710%.

Renaissance Institutional Equities Fund (RIEF)

The Renaissance Institutional Equities Fund or RIEF as it is also known is another of Renaissance Technologies top performing hedge funds. It utilizes some of the mathematical techniques that made the Medallion Fund so successful and applies them to primarily large cap equities. Its goal is to beat the S&P 500 by four to six percent per year while taking less risk. The RIEF was launched in the middle of 2005 and performed decently until 2008.

In 2008, the RIEF hit a rough patch and lost 16%. This losing trend continued in 2009 when it lost an additional 6%. But in 2010, it bounced back with a 16.5% return.

The Renaissance Institutional Equities Fund is designed for institutional investors and it has a theoretical capacity of $100 billion. This is a staggering number and it boggles the mind to think about managing that much money. Sure, a hedge fund manager can deliver staggering returns when the assets under management are low, but to continue delivering great returns on a fund this size would be quite an accomplishment. But if anyone can do it, I’m sure Jim Simons can.

Renaissance Technologies: A Brief History

Jim Simons started Renaissance Technologies all the way back in 1982. If he had started earlier, say the 1950s like Warren Buffett, there is a good chance that he would be the world’s richest man, because his annualized investment performance beats Buffett hands down. It’s just that Buffett had a few extra decades to compound his money.

Prior to 1982, Simons was primarily an academic. He taught math at MIT and Harvard and he later was appointed the chairman of the mathematics department at Stony Brook.

Simons put his mathematical training to a much more lucrative use when he started Renaissance Technologies in 1982. At Renaissance, Simons became one of the first pioneers to apply advanced mathematical and statistical concepts to the financial markets and this proved to be quite remunerative. In fact, since 1989, the Medallion Fund has returned 35% after fees, which is quite an amazing number that bests both Buffett and Soros. And what is all the more amazing is that Renaissance’s fees were some of the highest in the hedge fund industry, with management fees approaching 5% and performance fees approaching 40%. So the raw return before fees was enormous to say the least.

Jim Simons

Apart from his accomplishment in finance, Jim Simons has made quite a few contributions to academia as well. Perhaps his biggest contribution apart from his multi-million dollar contributions to Stony Brook is the Chern-Simons theory which mere mortals like us may never understand. It has something to do with quantum field theory and involves a level of mathematical abstraction that probably requires a genius IQ to understand.

Simons has also been doing quite a bit of philanthropic work. He started the Paul Simons Foundation to fund educational and health initiatives and he is funding healthcare initiatives in Nepal through the Nick Simons institute. In 2006, he kept the Relativistic Heavy Ion Collider running by donating $13M to the Brookhaven National Laboratory and he also donated $25M to the Stony Brook Foundation.

In 2008, Simmons made the largest single donation to a New York University when he donated $60M to fund a center for physics and geometry at Stony Brook.

Hedge Fund Hub Daily Reading: January 5, 2012

Todd Harrison: I am Gross
Well Harrison didn’t exactly say that, but he mentions that after reading Bill Gross’ latest missive, their views are becoming more closely aligned. Deleveraging is the big issue and things get jiggy when rates near the zero bound. One scenario posited by Harrison is a bounce to S&P 1360 based on the reverse head and shoulders, plus the fact that this is an election year. Then a big crash based on the fundamentals of deleveraging and running into the zero bound of interest rates, unless of course rates go negative.

Charles Hugh Smith: Putting Iran Out of Business
Smith offers a novel idea of how to topple Iran’s regime without risking the lives of soldiers and billions of dollars in military expenditures. Oh, and it will make it cheaper to fill up your gas tank and heat your home too. But there is one catch…

Gregor: Food Price Increases
Why food prices are rising: bad weather, running out of arable land, running low on water, changing rain fall patterns, rising energy prices, rising NPK prices and population growth. Countries that are low on water or on energy can synthetically import these commodities by importing food. But when countries like China and India with two billion hungry people to feed import food, they have a global impact on food prices.

ZeroHedge: Hedge Fund Winner and Losers
It must feel good to be Jim Simmons and horrible to be John Paulson. Simmons’ RIEF is up 34.66% for 2011, while Paulson’s Advantage Plus is minus 47.77% (that will leave a mark). I hope that your portfolio contained a few hedge fund winners in 2011.

Zero Hour: The Zero Bound of Interest Rates
Now we only need $4 of debt to create a dollar of GDP. What can go wrong with this?

Mish: Hyperinflation is not a monetary event
Need I say more?

“As a general rule, losses make you strong and profits make you weak.”
~ William Eckhardt [If you don't know who Eckhardt is, you don't deserve to call yourself a trader.]

Todd Harrison: Ten Themes for 2012
Some of the more interesting themes include: higher interest rates, all eyes on Germany regarding further debt issuance, more geopolitical strife, financial asset performance driven by policy makers instead of fundamentals, and family values will gain in importance.

That’s Gross
Bill Gross is shifting from a muted growth “new normal” to a bimodal fat tailed forecast, which includes black swans. We risk massive deleveraging and deflation on the one hand or monetization and enormous inflation on the other hand. And who gets to decide which outcome occurs, omniscient policy makers, of course.

Mish: 2012 Debt Rollovers
If you thought Europe had it bad, take a look at Japan, it has to roll $3T of debt in an economy with a GDP of $5.5T. If rates ever go up to 3% in Japan, they are going to have to spend all of their tax revenue on interest alone.

To Be Awesome
Chris Guillebeau: “To be awesome in 2012, ask what the world truly needs that you can genuinely provide. Then, spend some time every day for the rest of the year building that thing. Better get to work: you only have 361 days left.”

Hedge Fund Hub Daily Reading: January 3, 2012

Why markets have become so difficult to trade
Fiscal and monetary policies are distorting market signals. Trading in the current environment is like flying an airplane with miscalibrated instruments.

Mr. Dalio, I presume
Hedge fund firm Bridgewater’s AUM has surpassed $120B. Wow! Expect slow growth and high unemployment throughout the developed world for at least another decade. Deleveraging will take 15 to 20 years and we are only four years into it. This will keep interest rates in the U.S. low for years.

Paul Krugman: We need more debt
According to Krugman, all our problems would be solved if we would simply take on more debt. The reason we haven’t had a stronger recovery is that we haven’t assumed enough debt. The time for austerity is when the economy is doing well. So during the latest boom, why didn’t government rein in spending and pay off more debt than it did?

Ron Paul Unelectable?
Granted, Paul is a long shot, but unelectable?

Simon Black: Simple Truths for 2012
Western nations are insolvent. Economic growth is unlikely. Social unrest is the end result, while governments will expand their powers at our expense. When things fall apart, they will fall apart fast. Be prepared.

Chart of Hedge Fund Performance 2011
Take a look at the chart at the top of this article for a quick overview of hedge fund performance in 2011. It’s ugly, just extremely ugly.

Online Reputation Management

Online Reputation Management for Hedge Funds

Online reputation management is becoming increasingly important for hedge funds and other companies that want to raise capital. Often a single unwarranted negative comment is enough to make a prospective investor pass on what would otherwise be a very compelling investment. As a hedge fund manager or a CEO looking to raise capital, you can either fall victim to unwarranted negative press or you can rise above the negativity by employing an online reputation management service or bringing the online reputation management process in house.

Online reputation management is essentially an offshoot of traditional search engine optimization. The goal of SEO is to get a single listing, for example the url of your website to the top of the search engines like Google, Yahoo or Bing. Online reputation management is similar to SEO but is a lot more involved. The typically scenario is this: a disgruntled investor or a competitor posts an unwarranted negative article on their blog and this story attracts enough attention to rise to the top of the search engines and damage your reputation and turn away potential investors in your hedge fund or business.

You could do nothing as this negative publicity harms your business prospects or you could strike back with online reputation management.

What this would entail is essentially making sure that the search engines rate the positive things that people have to say about you more highly than the negative stories. (Now keep in mind that if people are saying bad things about your hedge fund because they are true, online reputation management would be a losing battle for you. It is only going to be effective if the negative publicity is truly unwarranted.)

Step 1: News Generation

The first step in online reputation management is ensuring that all of the good news about your hedge fund or company gets out. Often there is a lot of good news that simply goes unreported. Your job is going to be getting all of this good news out. When your fund does something newsworthy, issue a press release. When you have a relevant story, contact the top bloggers in your industry. And always utilize your own news outlets, such as blogs and social media. The real key is to tell your story in as many places as possible so that the word gets out.

Step 2: Promotion

Now that there is a lot of raw material in the form of good news about your hedge fund or company out there, the hard work of the second step is about to begin. The second step is promotion of all of the good news and buzz that was generated so that the search engines begin to rank all of the favorable news about your hedge fund or company above that of the unwarranted negative article. This is akin to standard SEO except now the goal is to get ten different urls ranked highly on the first page of the search engines instead of a single url. The reason you need to get ten different urls ranked is that this is the number of results displayed on the first page of the search engines. With online reputation management you will need to ensure that favorable news dominates all of these positions so that the unfavorable news story is pushed off the first page of the search engines where no one will see it.

Now, how all of this promotion of positive news occurs is beyond the scope of this article, but it entails the creation of positive references or links to the good news articles by search engine approved methods of reaching out to influential bloggers and websites and sharing your story to encourage links to these articles that showcase your hedge fund in a favorable light.

What to Expect

So as the online reputation management process starts to take effect. The unwarranted negative news about your hedge fund or firm will be slowly pushed lower and lower in the search engines and replaced my many favorable articles about you and your firm. Remember the negative effect of one unfavorable mention of your fund has at least ten times the effect of a single positive mention. So as the favorable stories start to overwhelm the negative one, you will begin to have a considerably easier time attracting more investors to your hedge fund or your business.

Now don’t expect online reputation management to be either cheap or easy. Traditional SEO is already an intensive and expensive process and online reputation management is roughly an order of magnitude harder, because ten search engine listings must be optimized instead of only one listing. You can try to do this in house, but if you are a hedge fund manager that his worth his salt, you are probably better served by looking for an online reputation management service provided by a well regarded SEO firm, and sticking to what you do best which is extracting alpha from the markets.

Overcoming Fear of Rejection

Overcoming Your Fear of Rejection When Seeking Accredited Investors

Most people, including potential hedge fund managers have an innate fear of rejection. From an evolutionary perspective this fear seems to make a lot of sense. Get rejected by the tribe and you don’t pass on your genes and your lineage is wiped out.

But in the modern world, the fear of rejection can hold you back when starting a hedge fund. Unless you have people tripping over each other to give you their capital, you are going to have to talk to a lot of prospective investors to raise the funds that you need to launch your hedge fund, and the majority of them are going to say no.

You can let your fear of rejection hold you back or you can learn to overcome it by doing the following things.

First, make it your goal to get rejected by a certain number of prospective accredited investors per day. This completely reframes the problem from one of trying to avoid rejection to one of almost seeking rejection and not caring so much about it. When your goal is to avoid rejection you will end up making fewer calls on investors so that the chance of being rejected is lower. But when you are actively seeking rejection, you will be focused on making more calls. And as you get better at pitching your hedge fund you will find that you have to make more and more calls to reach your rejection quota.

Second, start small. Don’t pitch the $20 billion hedge fund that you have been salivating over on the first day. Start by pitching a number of small investors first. Focus on the prospects that you are a little more care free about first. If you land them, great, but if you don’t its no big deal. This way your fear of rejection is lower and you will have time to practice and refine your pitch.

Third, do the thing you fear everyday. If you fear being rejected by potential investors, you have to pitch your hedge fund to new prospects everyday. Your mindset toward selling your fund is like a muscle. The more you exercise it, the stronger it gets, until eventually you almost start to look forward to being rejected, because each rejection is a step closer to more capital for your hedge fund.

Fourth, another important mindset to have is that you can’t lose what you don’t possess. If a potential investor is not interested in investing, it is no loss. You never possessed their investment in the first place. So the way you entered the meeting is the way you left it. You haven’t lost anything, so don’t make their rejection to be a big loss. You’ve lost nothing except for a bit of time and you’ve actually gained something. You’ve gained a little more courage when meeting with investors that you can apply when you are meeting with a large pension fund or university endowment and you’ve learned a little more about things that may or may not work when pitching your fund.

Henry Ford once said:

Failure is the opportunity to begin again more intelligently.

 

Take this to heart. Review your last investment meeting. Evaluate what went right and what went wrong. Learn from each meeting and do more of what went right and less of what went wrong, and eventually you fill find that things start going right more often than they go wrong.

Fifth, learn to exit meetings gracefully. If a prospect has no desire to invest, do your best to learn why. Affirm that you accept their decision then ask them you tell you the reasons why they are not investing. Then listen carefully. Write everything down and use this to refine your pitch. This will take your mind off rejection and focus it on something that is much more constructive and beneficial to your fund raising efforts.

Sixth, replace the fear of rejection with a greater fear. Learn to fear regret more than rejection and your fear of approaching immense institutions will abate. Focus on the consequences of giving into your fear of rejection. Think of the millions of dollars that you will not be managing, the fees that you will not be earning, and the clients you will not be helping if you allow your fear of rejection to overwhelm you. Think of how you will regret not giving it your best in three years when you are forced to go back to work for someone else’s firm if you don’t face your fear of rejection and raise sufficient capital.

Remember, if you don’t learn to overcome your fear of rejection, your hedge fund won’t grow to its full potential. You might be the top hedge fund manager in the world, but people simply won’t know about it and they won’t invest in it. It is absolutely critical to face your fears, look them straight in the eye and overcome them to build a successful fund.

Hedge Fund Manager Salary

A hedge fund manager salary is nothing to sneeze at. It can top four billion dollars. (And you thought doctors were well paid.)

The highest paid manager, David Tepper made $4B. Tepper did this by making a contrarian bet on financial companies.

Runner up, George Soros, didn’t do so bad either. He made a mere $3.3B by generating 29% returns through global macro investing.

In fact, the average salary of the top 25 hedge fund managers in the world was $1B. Not a bad salary for a year’s worth of work. To put this in perspective, this is equivalent to 20,000 people making $50K per year.

Take that Tiger Woods!

So the real question is how do you join the club? The answer is simple, you have to mint money by investing. The best fund managers get 20% of the profits that they generate.

How to Make $1B

So if you want to make a $1B salary, you have to make $5B for your investors. Simple, right?

So how exactly do you make $5B?

You start by making great investments. Now I’m not talking about 1X or 2X returns. I’m talking about 10X to 50X returns like those that were made during the implosion of the subprime bubble by hedge fund managers like John Paulson.

Sure you could make 50X betting on some penny stock option. But how much money would you put into that trade?

So the second key is to find a trade where the risk of loss is so small that you can bet big.

What you are looking for is a trade that is massively asymmetric, where you are risking a penny to make a dollar and so your risk of loss is very small relative to the potential payoff.

Back in 2007, Paulson paid a few basis points to buy protection on subprime mortgage backed securities and he made billions when they defaulted.

You might think that these opportunities are long gone, but one hedge fund manager who is responsible for more than $15 billion dollars in assets begs to differ.

He says that “all of the asymmetry in the world lies in [this trade]“.

To find out what this massively asymmetric trade is, enter your email below.

Keep in mind that this is definitely not investment advice, I am merely sharing information that I found interesting and think that you might find interesting too.

Partner Fund Management

Partner Fund Management was launched by Christopher James in 2004. It is a hedge fund management firm that runs a number of funds focused on healthcare, technology and the broader stock market. It isn’t as big as the Paulson Hedge Fund, but it is definitely as noteworthy. It is located out west in the city of San Francisco and it also employs the talents of Christopher Aristides and Brian Grossman.

Partner Fund History
Prior to starting Partner Fund, James ran Andor Capital Management. Then he launched Partner Fund with the backing of Goldman Sachs. The firm runs close to $2B in its various equity strategies.

Partner Hedge Funds
Partner Fund Management runs the following funds: Partner Fund; Partner Healthcare Fund; Partner Principal Fund; Partner Technology Fund and PFM Meritage. It tends to run a very concentrated portfolio.

Partner Fund Holdings
The firm has a heaving weighting towards Healthcare and Technology as these industries are where it has a great expertise. But it also has a fair allocation to other sectors of the stock market through its more generalized funds. Some of its top holdings include the MSCI Emerging Markets ETF, Google, Wyndham and Salesforce.com.

High Stakes Wagers
When James isn’t making large wagers in the financial markets he can be found making massive wagers in fantasy football. He is a member of a $1M fantasy football league with the likes of Paul Tudor Jones, Stanley Druckenmiller, Michael Novogratz and other hedge fund heavy weights. The dues to enter the league are $100K and membership is capped at 10 members.

But the most interesting thing about this league is that the winner keeps his winnings. Instead everyone plays only for bragging rights. The winnings go to a charity started by Paul Tudor Jones called the Robin Hood Foundation. It supports a number of charitable foundations in NYC. So the real winners are the people who these charitable organizations help.

Trian Fund Management

Trian Fund Management is run by Nelson Peltz, who is known for having earned a high hedge fund manager salary. Trian’s primary focus is value investing in publicly traded stocks.

In 2011, Trian acquired a stake in Family Dollar Stores and announced that it wanted to take it private. But this offer was rejected by management.

Trian Gets Its Start
The seeds of Trian were planted a long time ago, back in 1984. Peltz controlled Triangle Industries and used it to take over National Can. Triangle was much smaller than National, but it received a lot of help (and financing) from junk bond king Michael Milken.

Later another of Peltz’s vehicles Triarc acquired the fast food chain, Wendy’s. It was renamed Wendy’s Arby’s Group and floated on the NYSE.

So based on the names of his companies, one might surmise that Peltz is fascinated with “tri” or perhaps the number three.

Peltz doesn’t just buy and sell stocks, but he is known to get involved with the underlying businesses that he purchases. He isn’t afraid to get his hands dirty and he works hard to make sure that they perform to their full potential.

The Best Advice Peltz Received
Peltz says that the best advice he ever received was from his father, who told him to work on increasing sales, while keeping expenses under control. This advice of course makes a lot of sense, but the real difficulty is not in understanding it, but in implementing it. Everyone, well almost every business, is trying to do this but not every business is succeeding at this task. But when they do succeed, shareholders and investors do very well.

After buying Snapple in 1997, Peltz had it focus on delis and pizza joints and this singular focus reignited growth in sales. As sales rose, Peltz made sure that expenses were tightly contained. This caused margins to grow and the value of his investment in Snapple to increase.

His shrewd investing and business acumen has allowed Peltz to generate a net worth that is in excess of $5B, which is quite a tidy sum of money. Peltz has homes in New York, Paris and Palm Beach. His Palm Beach house is reputed to be one of the most expensive houses in the United States. All this is not bad for Peltz, who like Bill Gates, was a college drop out. He started college at Wharton, but never finished. Perhaps getting a degree wasn’t as important as getting started on building his fortune.

Hedge Fund Strategies

Similar to the joke about economists, though there are more than ten thousand hedge funds, there are eleven thousand hedge fund strategies. Well, not really, but for every hedge fund there is a different strategy or at least a different spin on a strategy. Otherwise, if they all did the same thing, how would they expect to outperform.

Risk Levels
Hedge funds are not homogenous. They take varying amounts of risk. Some may exhibit less risk than treasuries, while others may exhibit risk levels that are several times the most volatile of markets. It simply depends on the strategy that is being pursued and the amount of leverage that is being employed. Some say that the fund Long Term Capital Management was levered two hundred fifty to one. Now that is extreme and it nearly brought down the financial system back in 1998.

Hedging
Many, but not all, hedge funds hedge or attempt to reduce the risk in their underlying positions by shorting or through buying protection in the form of puts or other derivatives. The point of hedging is to reduce risk, while still generating market beating returns. However, hedges are often imperfect, which means that they don’t always zig when other investments zag. If they don’t track the inverse of the underlying closely enough, even a firm that is hedged can experience severe losses. Sometimes the losses will be so severe that they exceed what would have occurred if the firm was unhedged.

Types of Strategies
Global macro is the strategy that is the most well known. Early practitioners like Soros, Druckenmiller and Tudor Jones have made huge sums of money and equally huge wagers on global events and distortions caused by central banks. Soros and Druckenmiller are famous for betting against the Bank of England and winning, making more than $1 billion in a single day.

Market neutral strategies aim to generate absolute returns in excess of the risk free rate without fluctuations due to market risk. They do this by doing arbitrage or equity long/short where they buy a stock that is expected to go up and short a stock that is expected to fall. Buy neutralizing their market exposure they hope to avoid the fluctuations caused by the market while reaping the returns generated by good security selection.

Distressed securities strategies are ones that seek to buy the stocks or bond or other instruments of companies that are in deep trouble. Deep distress leads to equally distressed prices. Firms look to buy securities that still have value even in bankruptcy and hope to profit when the firm emerges from bankruptcy or is able to surmount the economic troubles that it faces. When they are right, they can make returns that are many times that of their initial investments.

Pure short selling strategies are rare because the stock market has historically gone up, so these strategies are akin to swimming upstream. But at the end of massive bull markets these strategies can be highly successful and the only strategies that generate positive returns when all other long based strategies are faltering.

Hedge Fund Due Diligence

Hedge fund due diligence is a complex and highly specialized process that is often delegated to hedge fund consultants. While you can let them do the hedge fund research, you should have a good understanding of the due diligence process and check up on them. After all, they may care about your money, but I’m sure that you care much more about your money than they do and at the end of the day you are responsible for your gains or losses.

Asset Allocation
The very first factor to consider when examining a hedge fund is how it relates to the bigger picture. Asset allocation is responsible for the vast majority of your returns, so if you are already over weight equities, there is little point in taking the time to research yet another equity fund, unless your existing equity fund manager is under performing.

Investment Strategy
Next you have to look at the investment strategy of the fund that you are considering. Many times you’ll see that a fund is really providing disguised beta as opposed to true alpha. They may be exposed to a hidden risk factor that is the true source of its returns as opposed to generating alpha from skillful trading. Are they highly concentrated in illiquid names and currently benefiting from the illiquidity premium in an era of excess liquidity? If they are, this could be a concern when liquidity dries up.

What Is the Edge?
Every firm should be able to explain their edge, or what it is that allows them to generate excess returns without taking more risk. Do they have an advanced HFT algo and co-location on the exchange floor that allows them to react faster than others? Do they have a stellar reputation that results in block traders coming to them first with their largest orders? Do they have a process that results in consistently good trades or do they rely on a single genius manager calling the shots? What is their edge and how likely will they be able to keep exploiting it is a very important question.

Proper Operating Structure
Ideally you would like to see segregated accounts at reputable custodians with full transparency. You want your investment kept separate from other people in case things go wrong. This way you retain full control over your money, while the hedge fund manager directs the trades in your own account. This also gives you good insight into what the manager is doing so that you can watch for style drift.

You also want the fund to have a highly trusted independent auditor. A small, no name auditor with no reputation is a big red flag. For all you know, this type of auditor could be the fund manager’s brother in law. You want an independent auditor with a national reputation to confirm that the hedge fund’s accounts are in order and that they money is where they say it is. Anything less and you better watch out.

Intuition
Trust your gut instinct. A fund may pass all of the tests, but something may not feel right. Don’t ignore this feeling. Fraudsters will often do everything in their power to make sure they look like a firm with the highest credibility. They know exactly how to say all of the right things and make sure that all of the boxes are checked, but sometimes your intuition can be your best guide.

Hedge Fund Research

There are more than 10,000 hedge funds, so what is the best way to perform hedge fund research to find the top hedge fund managers? The truth is: there is no best way to perform hedge fund research. You can probably start with one of the many hedge fund databases, but from there you will have to do a lot of leg work and due diligence. Hedge funds in general are very secretive and getting data and intelligence on them is difficult. But they are much more willing to give you information if you have something that they want.

Informational Leverage
Unless they have so much assets under management that they are turning away investors, hedge funds want your money. They want your money to increase the size of their assets under management so that they can have a bigger pay day in the future, when they generate big returns on their AUM.

Until they collect your investment, this is a significant source and probably only source of leverage that you have over them to get the information you need to make an informed investment decision. Once you sign on the dotted line, they have much less incentive to cooperate with your requests for information.

If a fund has a long lock up period or side car provisions, they can be even less forthcoming than a fund with no lock up period, so be especially careful with these types of funds. The longer you lock in the less concern the fund has about you withdrawing your money, so you have less leverage.

Integrity is the Word
When performing research on a fund the most important thing to understand is the people that run it. The most important quality above all others is integrity. They will be managing a significant portion of your wealth so they had better be the most trustworthy people you can find.

Do Your Own Homework
You have to do your own due diligence on this. You can’t rely on the impressions and presence of others whom you feel are good investors who have done their homework. At times, people invest in funds because other well known investors have invested in them. They assume that the presence of these well known investors means that all of the due diligence has been done and that the fund is legitimate. However, this is not always the case. Just look at the example of Madoff.

Madoff was a fund with tens of billions of dollars from many prominent investors. It was a Ponzi scheme that was a bag of hot air, but somehow many highly regarded investors were suckered into it. Everyone assumed that everyone else had done the required research and they did not bother to do their own research and just look at what happened.

So do not make the same mistake. Make sure that you meet all of the principals of the firm and make sure that your gut instinct says that they are trustworthy. Would you trust them with your wallet? If not, pass on investing in them.

Hedge Funds NYC

NYC and Manhattan in particular are often seen as the center of the financial universe and there are many hedge funds in NYC. These are some of the biggest and the best hedge funds and hedge fund managers that NYC has to offer.

Cerebus Capital
Stephen Feinberg runs Cerebus Capital from NYC. Cerebus is a $19B fund that specializes in distressed investments such as companies on the verge of bankruptcy. He worked at Drexel in its heyday when Milken was a master of the universe and making hundreds of millions when centi-millions actually were a lot of money.

D.E. Shaw
David Shaw runs D.E. Shaw & Co. It too is headquartered in Manhattan. Shaw was one of the first big quantitative investors who relied on computer models to trade financial assets and he was one of the most successful, right up there with James Simmons at Renaissance. His firm took a massive beating in 1998 during the whole crisis caused by the Russian default and Long Term Capital blowup. But his firm has bounced back and is still in business. He used to be a computer science professor, but as a hedge fund manager is worth more than $1B. Not bad for a rocket scientist.

Fortress Investment Group
Michael Novogratz runs FIG, which is a NYC based firm. It has more than $4B in assets under management and Novogratz is personally worth more than $2B. He got his start with Goldman and runs the firm with the assistance of Briger and Edens. He used to fly helicopters in the army and so he probably has nerves of steel, which is helpful in this volatile investment climate.

Goldman Sachs Asset Management
This is an internal division of G.S. It is also located in Manhattan and is responsible for more than $32 billion dollars. It has had a number of up and down years, but always seems to find a way to come out on top.

Millennium Management
Millennium is controlled by Israel Englander, who has a very interesting name that incorporates two countries in it: Israel and England. Englander donates tidy sums of money to Jewish causes, so it appears that he skews towards Israel. He is an outstanding trader, who unfortunately got caught up in the mutual fund market timing scandal. He got off fairly easy, paying $30M out of his own pocket and of course no jail time.

Third Point
Daniel Loeb runs NYC based firm, Third Point. He is an excellent stock picker who is known for writing caustic letters to under performing management teams. He is known for regularly going activist to get poorly performing companies to perform better after he makes large investments at fire sale prices.

Hedge Fund Definition

A hedge fund is a scheme designed to help hedge fund managers obtain billion dollar paydays through the use of leverage to make speculative bets on all manner of assets. It is an instance of heads I win and tails I don’t lose. If the wager succeeds the fund manager retains 20% of the profits. If the wager fails, the manager walks away and the investors are left with 100% of the losses.

Hopefully, you realize that I am being a little sarcastic here. The vast majority of hedge funds are run by outstanding people who are helping pension funds and institutions to generate good returns for the investments of their beneficiaries. It is true that there are and will continue to be a few bad apples, but the vast majority are providing a very useful service to ensure good returns for the retirement plans of their investors.

This is a more conventional hedge fund definition:

A private partnership of investors that utilize leverage to generate high returns

And here are a few other hedge fund definitions:

A highly flexible investment partnership consisting of a few wealthy investors that are allowed to employ speculative techniques, which are not allowed to other investors, to generate high returns

An investment fund that is only open to accredited (i.e. wealthy) investors which focuses on alternative strategies, which are dependant on alpha generation, rather than beta, and pay a performance based fee to its manager

An exclusive partnership, which is only open to institutions and high net worth individuals that focuses on generating higher returns with lower risk through strategies unavailable to retail investors

Sparsely regulated investments which trade stocks, bonds, currencies, commodities and many other non traditional asset classes in an attempt to generate returns that are not correlated to traditional financial markets

A fund that is designed to hedge away market risk by taking hedging or short positions against long positions in an attempt to generate alpha or excess return without market risk

A pooled investment structure which aims to achieve absolute returns rather than relative returns by making shrewd investment decisions

A term that is used for all many of private investment partnerships where the manager is compensated based on performance rather than size of assets under management, which tends to align the interests of the manager and investors better, reducing the principal/agent problem

Paulson & Co Hedge Fund

The Pauson & Co Hedge Fund is one of the largest and best performing funds in the world. After steadily outperforming in the field of risk arbitrage, Paulson predicted the subprime debacle and successfully bet against it using credit default swaps. This successful wager was what put his fund and his fund company on the map and earned Paulson the highest hedge fund manager salary in the business.

Paulson followed up by successfully catching the rebound in financials by switching from short to long in 2009 and generated even better returns for investors and a multi-billion dollar payday for himself and his firm. Recently, however, the Paulson Hedge Fund suffered a significant drawdown due to a decline in financials and a particularly ill timed investment in Sino Forest, which some believe to have issued bad financial data.

Is this the end of a good run? Or is this a minor speed bump in the road to ongoing out performance? Only time will tell.

Background & History

The Paulson & Co Hedge Fund primarily serves large financial institutions and pension funds and it is located in New York. The fund company that runs the fund is primarily owned by John Paulson and the employees of his firm.

In 2007, the firm began betting against collateralized debt obligations. These CDOs consisted of subprime mortgages that were packaged together into tranches. Though the individual mortgages were below investment grade, the top tranches were sold as high quality, low risk debt instruments with a higher yield. Many investors snapped these CDOs up because they thought that they were getting higher yields at a lower risk, but Paulson was selling them because his firm knew that they would eventually go bad. Paolo Pellegrini was instrumental in convincing Paulson to put on this trade in a huge size.

Paulson’s fund has been involved in a number of high profile corporate events, due to its roots in risk arbitrage. In 2008, it purchased a significant chunk of Yahoo in an effort to support Carl Icahn’s campaign to oust the board of Yahoo.

Also in 2008 the fund bet against a number of UK financial institutions like Barclays, RBoS and Lloyds. It made a killing when the share prices of these firms collapsed as they were caught up in the global financial crisis.

In 2009, Paulson & Co started a gold focused fund. Their thesis was that most of the world’s central banks would have to begin devaluing their currencies because their debts were so high. So Paulson began buying bullion and gold mining stocks and even denominated a class of his fund’s shares in gold. So far this decision looks prescient as gold has continued rising dramatically.

Top Hedge Fund Managers

Who are the top hedge fund managers in the world? Names like Soros, Simons, Druckenmiller, Paulson, Tepper, Dalio, Robertson and Kovner top the list. As a group they have probably pulled in excess of a hundred billion dollars out of the markets.

So where do we begin?

Let’s start with Paulson. In 2010 he received $5 billion in total compensation. Which the WSJ says is the biggest one year haul ever.

Paulson runs the Advantage Plus and a number of other funds through his hedge fund firm. He started out in risk arbitrage and corporate event investing. Then he branched out into other areas, including his now famous move in the subprime area.

Soros
George Soros is probably the most famous hedge fund manager of all time. He has made billions of dollars and probably has one of the best and longest track records of all the managers out there. In its first two decades, Soros and partner Rogers generated returns in excess of 30% annually, which absolutely destroyed the performance of the S&P 500. Soros also hired Druckenmiller, who eventually turned out to be a great hedge fund manager in his own right.

Druckenmiller
I’ve heard some one say that Druckenmiller combined the analytical abilities of Rogers, the trading skill of Soros and the stomach of a riverboat gambler. Druckenmiller generated amazingly good returns but recently shut down his fund after making so much money that he decided that the pursuit was not longer worth the impact on his quality of life.

Simons
James Simons is probably the idol of math geeks everywhere. He was formerly a math professor, who used his mathematical abilities to start Renaissance Technologies and build trading models that are extremely profitable. His trading was so profitable that he ended up returning all outside investor money and so that he could only trade the money of his firm.

Tepper
David Tepper is known for focusing on distressed securities. He buys stocks and bonds when everyone wants to sell them because they look like they are in horrible shape. A recent example of this is when he bought a large chunk of BofA when it seemed that the world was headed to a financial abyss.

Dalio
Ray Dalio runs the largest fund in the world, the Bridgewater Hedge Fund. It is focused on global macro. Dalio says that his funds performance is driven by a deep, intrinsic understanding of economics. His firm was prescient for anticipating the economic collapse of 2008.

A Top Hedge Fund Manager’s New Trade of the Century

You might think that if you missed shorting the sub-prime bubble, you missed out on the trade of the century. Granted, it was a spectacular trade that cost very little to put on because almost everyone thought that the bonds where triple A, and it paid off huge.

But one top hedge fund manager thinks that there is another trade that rivals shorting sub-prime.

And why should we listen to him?

Well, he is one of the fund managers who predicted the sub-prime debacle and profited mightily from its collapse.

In fact, he says that “all of the asymmetry in the world lies in [this trade].”

To find out what this massively convex trade is, enter your email in the form below.