Well I've actually learned how to set the time on this blog. So for this one the time posted is accurate.
I am on EDT (Eastern Daylight Time) - up until now the posts were being stamped about 1/2 hour behind PDT (Pacific Daylight Time).
Sheesh!
P.S. Gotta remember spring forward fall back I think. No auto adjustment for that.
The now touted newest possible disaster for hedge funds is those shorting the ABX.
To simplify - the ABX is essentially a derivative index of credit default swaps on subprime mortgages.
The short bet is that as the housing market declines subprime mortgage defaults are going to take off.
So far, apparently the bet hasn't paid off and it could cost the funds. Mortgage backed spreads have stayed tight, interest rates have come down, even home building stocks have come back a bit. And, so far at least, people haven't yet started to default in droves on subprime obligations.
Those using lots of leverage on the short bet are obviously the most exposed.
The analogy to the gas market (Amaranth) may be a bit strained. This is a much larger and purportedly less volatile market than that one.
In any event, this is one trade that from a broader social point of view would not be so wonderful to see the shorts win.
Don't touch that dial.
OK, time to deal a little more with the Alpha Beta phenomenon and money management.
Beta is essentially the perfomance of an index. Lots of it available cheaply through ETF's, index funds, etc. Think of Beta as a commodity.
Alpha is outperformance of an index - and it's the stock in trade of hedge funds. Alpha is costly - "2+20" is the standard. A 2% management fee plus 20% of gains gets paid to the fund manager. And in a FOF (fund of funds) structure you can add in an extra management fee.
Well, the question for 2006 (at least through August 31) has been "where's the alpha?". Through that date (after fees) hedge funds returned an average of 4.2%, according to some sources, whereas the S&P returned 5.8% for that period.
So, why are investors (in apparently ever increasing amounts) going after the elusive alpha?
One theory is that future likely composite returns from bonds and equities look to be maybe 6%. However, when investors like pension funds assess liabilities they need to do better than 6%. Hence, little choice but to gamble on getting the alpha.
I'd be interested in any other theories or any dissentions.
Citibank is reported to have broken talks with Amaranth about a possible purchase of Amaranth's assets. That can't be great news for Amaranth.
Pirates is reported to be closing to new money.
Small hedge fund managers don't have much of a share of the action. 80% of hedge fund industry assets are purportedly controlled by about 125 out of some estimated almost 7,000 funds.
This one is a bit technical - hey it can't all be light and breezy.
Hedge fund promotors offering private placements to non-accredited investors and hoping to comply with Reg D (the '33 Act registration exemption safe harbor) generally have to furnish certain financial statement information to such investors.
For offerings in excess of $7.5 M it looks like the pertinent financials required are to be found in SEC Reg S-X Secs. 210.3-18,6-07, and 6-09.
Real enthusiasts are advised to Google on Reg D and Reg S-X to find the pertinent rules.
The "take away" (I hate the term) is that fund promotors relying on Reg D should make sure that they are furnishing their non-accredited investors with the Reg D required financials in addition to non-financial information on the deal.
BTW the latter, i.e the non finanical information, is typically disclosed through use of a PPM (private placement memorandum) generally prepared by a lawyer. The former, i.e. the financials, is going to require some involvement from your friendly local accountant.
Accredited investor only deals don't have to make these financial disclosures. So, many funds don't accept any non-accredited investors, in part to avoid this extra disclosure baggage.
Here's the opening lyrics:
Chain, chain, chain, chain, chain, chain
Chain, chain, chain, chain of fools
Five long years I thought you were my man
But I found out I'm just a link in your chain
You got me where you want me
I ain't nothing but your fool
You treated me mean oh you treated me cruel
Chain, chain, chain, chain of fools
Sung by Aretha Franklin
Remember the old song with the lyrics "...chain, chain, chain - chain of fools..."?
Reports are that Hil S - ex hedge honchette - current South Florida resident has already paid over $1M in fines and restitution in an SEC civil action previously brought against her.
She still faces criminal charges - next court date October 10.
So despite the alleged $300K in gains from her short on the PIPE - not a good ROI.
A prior entry in this blog had Pirate Capital LLC (Pirates) down this year.
Recent press reports have Pirates up 3% this year - compared to about 7% for the universe of activist funds.
The SEC investigation of whether Pirates ran afoul of securities law by failing to timely disclose it had sold stocks is still on. Pirates says the regulatory matter was a misunderstanding that it has corrected.
Any defenders of Pirates out there - let me know.
This is a "tell it like it is" blog.
With one major exception, nobody and nothing is sacred.
The exception: I am also a lawyer and one thing that doesn't get discussed in this blog/blawg are client matters.
Actually in the illustration in the prior blog $27.35 is the commissionless "breakeven", so the shares have to get above that price to win in a no-commissions world.
As noted, and as bears repeating, in the real world the effect of commissions will be to increase the breakeven price.
Presumably, hedge funds that do a lot of business with a broker (often called a "prime broker") get better commissions than John Q. Public. I would not be shocked to hear that they get better execution as well.
