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Why Bother Running a Hedge Fund?
You’d think with the spectacular performance I was fortunate to bring in last year, I would have new investors pouring in over the transom, bombarding me with requests for offering documents, and asking for presentations to investment committees.
The sad truth is that I’m pouring over my list of limited partners, trying to decide who to keep and who to dump. The diplomatic, patient ones who took me out to lunch at Gary Danko’s, invited me for a day on San Francisco Bay in their mega yachts, and went on extended vacations when the markets turned ugly, are in. The others who made law suit noises when I had one down month, sicced an army of due diligence consultants on me, and even hinted at withdrawals, are history.
Keeping my life simple by limiting investors to a coterie of buddies who love me, come hell or high water, is a consideration. But my main concern is that the House is certain to pass legislation this year forcing hedge fund managers with more than $150 million in assets under management to register with the SEC.
No, I’m not worried about a surprise visit from the blind, deaf, and dumb pencil necks from the federal agency, certain that my own accounts and reporting are accurate down to the last farthing. After all, SEC registration didn’t clip Bernie Madoff’s wings, or stop him from stealing $65 billion from clients, despite multiple canaries loudly singing that something was rotten in Denmark.
For me, it’s just a cost issue, as the continuous filing and inspection requirements and legal fees can run into millions of dollars. It’s not like I can offset these unwelcome new expenses with a 3% management fee and a hockey stick performance bonus any more, like in good in the old pre-Lehman days. Why bother? I’d much rather pass this savings on to my clients. And why become a witch, just as the Salem witch trials are starting?
To make things worse, the House is also threatening to tax my 20% performance bonus, otherwise known as a “carried interest” not at the current capital gains rate of 15%, but at the ordinary income rate of 35%. What kind of rip off is this? That’s about as welcome as someone pouring sugar in the fuel tank of my Gulfstream.
With any luck this will get bottled up and diluted in the Senate, as with health care. What are we paying all these lobbyists for, anyway? It is, after all, a tax, something that is despised on the right, the middle, and some of the left. How hard can that be to shoot down? If the House tries to expand this treatment to the oil and gas industry, which has enjoyed special tax treatment since the pre Cambrian age, the cow manure will really hit the fan, giving our august chief legislative body the fragrance of a Texas ranch after a late summer rain.
And now I hear that mutual funds are trying to clone my trades and sell the package retail. What’s next? A hedge fund ETF? Have they no shame? This will only end in tears.
The harsh reality is that hedge fund managers are being scapegoated and demonized for the financial crisis, ignoring the fact that no hedge fund was bailed out, took any TARP money, or threatened any systemic risk. Sure, the funds that went under took a few wealthy limited partners down with the ship, as they so richly deserved when they didn’t understand the strategies, skipped the due diligence, and were simply trying to buy last year’s track record.
If the government has to regulate, it would make much more sense to do so with the top one third of funds that control 95% of the industry assets and have over $10 billion in assets, and can afford it. But sense never seemed to be a prerequisite for legislation coming out of Washington.
For more iconoclastic, out of consensus analysis, visit www.madhedgefundtrader.com, where conventional wisdom is drawn and quartered daily. You can also hear me in person weekly by listening to Hedge Fund Radio by clicking here at http://www.madhedgefundtrader.com/Hedge_Fund_Radio.html
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I'll preface my comment by saying I'm a diehard libertarian that despises taxes, most regulation, the war on drugs, international occupations, blah blah blah. I also manage $1.5 billion.
With this said, the notion of taxing carried interest at capital gains rates is comical. Carried interest is paid as a percentage of profits, which are generated through labor. You're taxed for the fruits of labor much the same way a general contractor is paid for completion of a job, an architect for designing a plan that is selected for construction, or even a sales hack that receives commissions as a percentage of sales. In all cases, the incentive is variable. As for the comment that it's at risk of "zero"...who effing cares. Beta has a natural positive return (uh, well, most of the time) so only the worst hedge funds ever risk a zero (or your clients leave, in which case you still pocket 1% excess management fee).
Furthermore, it is illegal for various types of investment vehicles to take carried interest. Pensions, mutual funds, foundations...basically anything that is not a limited partnership or offshore corp. So the notion "carried interest" being taxed at cap gains is structural aspect of the legal formation that applies only to private offerings (primarily PE, VC, and hedge funds). This, of course, is an absurd give away to a select group of citizens that in my mind is hardly different than the UAW's exemption from Barry's "cadillac" healthcare plan tax or Citi's mammoth tax forgiveness when the US Treasury waived the change of control clause on their loss carryforward. In all cases, the average citizen (the mythical American middle class) takes a swift kick in the nuts at the expense of a select few.
I should point out that my readers did catch a move in the TBT last year from $35 to $60, then again from $42 to $50. You can't judge a daily newletter from just one post. Here is the link on the call http://www.madhedgefundtrader.com/January_5__2009.html You have to trade these leveraged ETF's, not let them grow hair. Most investors are not set up to trade futures, which is what I use. Remember the sale of the long bond at 140 a year ago?
For what it's worth, I am decended from two of the Salem witches who were hanged. Don't want to do a repeat.
"To make things worse, the House is also threatening to tax my 20% performance bonus, otherwise known as a “carried interest” not at the current capital gains rate of 15%, but at the ordinary income rate of 35%. What kind of rip off is this?"
Tyler, is this guy supposed to be satire, or is this simply a platform for the middle-aged, white boy, know-it-all fucks to speak their peace? I love the new math that determines a bonus is really carried interest. What a tool.
Though I am loathe to any taxes, I fail to see your great contribution to society that entitles you to pay less than half the rate that someone working all year for 100K does. And I will have to put in the word to the prep cooks at Gary Danko to spit in your food the next time you're there. Gosh, the economy will be hit hard by your not being able to buy a 3rd Bentley.
How lucky for the investors you deign to be unworthy of your presence. It'll be good for them to be in cash before the market shits the bed again in March.
I am going to be honest. I used to listen to this pundit tell me how great he was doing while pushing his oversold trades. recently he was once again talking about tbt and by all the indicators it was once again bought.
I no longer take the investment advice from this person, in fact I bought treasuries because they way I looked at things tbt was duw for a correction. My target entry point was under 48, and he was pushing it above 50.
The guy writes here because he isn't good enough to gt a real job. for your own best interest don't listen to him. Nothing is worse than a guy who tell you how great he is over and over, thne leads you into his over bought trade.
I was listening to him talk Tbt in the 60's.
Hopefully the zero hedge team will see through his bs AND HE WON'T BE HERE FOR LONG.
If you think his book-talking posts are good here, you should check out the self grandising stuff on his website.
I share your views. MadHedgeFundTrader has a number of secular trend trades, like shorting US Treasuries. But his advice for playing these trades are retail ETFs (like TBT, USO, UNG) that have been have been shown as just another way Wall Street screws the retail investor. If MHFT was truely a "hedge fund trader" he would be using futures and forwards to express his trading ideas.
When you referred to carried interest, you phrased it, "otherwise known as 'carried interest.'"
You state it thusly to blur the line between carried interest and what you really, really wish were carried interest. It's carried interest only in the way celery is a monkey, or a parking lot is a rainbow.
If your money is at risk, welcome to the cap gains rate, my friend! If you managing someone else's money, it's laughable for you to claim your paycheck is carried interest.
And you know all of this of course. Be honest and say, "Hey, I deserve this tax rate because of all the political contributions I make."
Hedge fund has always conjured an image of being hidden.
Just what is in hiding?
Funny how there is no shortage of "investors" who just don't want to know....just gimme a market beating roi.
Eating soap is well deserved:)
40muleteam borax
For what it's worth I don't begrudge you your Gulfstream.
Good luck. My fund has produced 15 consecutive years of excess returns, albeit with a bit more volatility than we'd intended. Our liquidity terms were generous - I thought that I shouldn't need to tie up my LPs with lockups or the like, that they were smart enough to stick with the investment. Dec 2008, 98% of investor money withdrew, mostly because they had to - their other investments were locked up or with Madoff or otherwise unobtainable. 2009 was ok - we are market neutral and thus looked feeble compared to dart throwing beta baboons. No money coming in, though the few remaining investors love us for protecting the downside (we got everything out of Lehman with two days to spare) and generating some return. I'm shutting down at the end of the month. Fortunately, I can retire if I want to, but it just is a strange world, with investors acting substantially against their own interests. What was hot over the last six months? HFT? That's where all the quant money has been flowing. Guess what's going to underperform this year.
We have been registered - it's not a big deal. It doesn't really do anyone any good, but only cost us a few hours every few years for an exam. Last time the SEC was here for one day, we had all the docs they needed. No issues.
Just 'cause you're not a witch doesn't mean you can't be hanged for it.
- John Proctor, Salem, MA
Once I figured MHFT out, his articles became so much more enjoyable...
This is why hedge funds are fearful out of their minds about an audit: it doesn't cost much--so don't buy that story. Their real fear has to do with the unrealized capital gain compensation. I would venture to say that if you conducted a forensic audit of the twenty biggest funds and they had to mark their positions? You would find that alot of compensation was earned on illiquid, mis -marked, and even fraudulant positions.
To date, hedge funds make their own accounting and compensation based on alot of hocus pocus.
If you clear at jpm, gs, or bcs? And, you run a hedge fund? YOU were "bailed out." You echo the CNBC mantra.
"You’d think with the spectacular performance I was fortunate to bring in last year"--you mean you tracked the indices? C'mon.......................
Boo-fucking-hoo.
Janet Tavakoli
President, Tavakoli Structured Finance, Inc.
Posted: January 22, 2010 10:59 AM
Show Bernanke and Geithner the Door
What has the financial crisis taught us? Among other things, we should show Bernanke and Geithner, enablers from the previous administration, the door. Paul Volcker is right to ask for a return to Glass-Steagall. It worked until it was eroded over several decades by bank lobbying. Banking and speculative trading activities--even when done for "customers"--don't mix.
"Financial innovation" must be limited, since much of it in recent years was the financial equivalent of card cheating. Banks should not be allowed to sponsor hedge funds and private equity funds, and furthermore, they should not be allowed to lend to them through prime brokerage units or other means. Financial institutions must be allowed to fail. Hedge funds require regulation. Malfeasance should be investigated and prosecuted. Credit derivatives should be traded and cleared through exchanges and made transparent. Compensation and financial incentives at banks must change. Bank employees cannot continue to reap huge rewards at no personal risk while shoving risk into the global financial system.
President Obama promised us change, and he should seize this opportunity to demand sweeping financial reform.
Goldman Sachs's stock went down a few percentage points. It became a newly created "bank," to get on the taxpayer give-away gravy train. JPMorgan Chase claims only 1% of its revenue comes from proprietary trading, yet even before its merger with Bear Stearns, JPMorgan's market share of credit derivatives was greater than 50% for U.S. banks. That meant you could combine the credit derivatives of all other domestic banks, and JPMorgan's positions were greater. Those are just two examples. Banks' "non-proprietary" trading desks are often invisible hedge funds.
http://www.huffingtonpost.com/janet-tavakoli/show-bernanke-and-geithne_b...
Nice!
My absolute favorite hedge fund manager story:
Lahde Quits Hedge Funds, Thanks `Idiots' for Success
I quote Mr. Lahde:
``I was in this game for money,'' Lahde, 37, wrote in a two-page letter today in which he said he had come to hate the hedge-fund business. ``The low-hanging fruit, i.e. idiots whose parents paid for prep school, Yale and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government.
``All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other sides of my trades. God Bless America.''
Lahde, who managed about $80 million, told clients he'll be content to invest his own money, rather than taking cash from wealthy individuals and institutions and trying to amass a fortune worth hundreds of millions or even billions of dollars.
``I do not understand the legacy thing,'' he wrote. ``Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.''
Consider the lilies of the field
I pay 35% tax on my "performance bonus"
Why does you "performance bonus" should be taxed @15%?
Just curious...
the thing that NOBODY talks about is that hedge funds are the reason why we have made it out of the doldrums of 2008. who is it that has been buying illiquid distressed assets, making deals, providing liquidity to the markets nd taken risks when the banks are in no position to do so? Hedge fucking Funds. If it weren’t for the HF's, we would absolutely be in the shitter. Consider the billions they have put to work over the past year.
HF's should be thanked, not demonized. If you dont realize this than you are a moron.
We made out of the doldrums??!! In what planet are you living??
Wasn't long term capital management a hedge fund? and what was the name of Vikram Pandit's hedge fund? oh thats right Old Lane Partners and wasn't that folded into shitibank?...oh how many other internal hedge funds?...i'm sure none of the losses were commingled or transferred....
i think we rose from the ashes through taxpayer backstops, accounting forbearance, and that wonderful thing called monetization
mommy if you take off my training wheels won't I fall?
Your comment made me laugh.
Of course your logic only works when the market is going up.
See you among the unemployed and bankrupt.
After reading several of your columns I am convinced you are a college dropout living in your mother's basement writing fiction.
Most basement dwellers at a parents home these days appear to be college graduates, especially recent graduates or those who have been made redundant through off shoring...
well said Miles!!!
so why don't we just tax the top 5 % of income eaners as well then ??
I think it's a good idea, notwithstanding the fact that I am against any and all taxes.
Forget Obami he hasn't a clue. Wrong way Corrigan as
usual. Worrisome to me as things have changed since
Volcker was in the mix I wonder if his new found
confidence is justified. What's changed? Banks role
in the world as intermediaries that disperse
risk. Breaking them up isn't going to solve the too
big to fail because the individual pieces will do the
same just individually. But if DC feels risk taking
should be left to the perceived pros all the better for you.
Just know your style expertise and stop with the
style drift get you into trouble every time.
While I understand the spirit of your message check
your facts. According to the Flow of Funds report
hedge funds were TARP benficiaries. Thought through,
yesterday only benefits hedge funds and private
equity funds. Going forward pension funds have the
upper hand and will use more rigor than your average
HNW guy when deciding to invest in alternative
investments. If a alt asset manager doesn't like
the scrutiny they can't default to HNW money because
those folks have fled to safer investments they
can understand with whatever they have left. If
more HF shutter just as well they don't deserve
to be in business anyway. Like US cos. whose margins
are being squeezed why should alt assets mgrs be immune
because they have some special money making elixir?
Haven't seen much evidence of that lately. Beyond
2009 being a banner year for all whom had a pulse.
Back to making money the old fashion way because you
earned it.
honest question:
if you run a fund then WTF are your daily disclosures ??
especially since the last few r-tickles / calls have been pretty good 180's of what occurred that day in the mkts (i was short what you were long).
understand you're not a trader and a defined macro mgnr (and not trying to bust balls), just wondering where a disclosure might be ?
I think the whole damn thing is a Ponzi and you're going to get blasted as the tide recedes even more. Enjoy your wealth while you have it, though.
Grab a shovel and start digging for Democracy.
Your hedge fund is a suckers bet based on fallible money, not liberty. This illustrates you are short on common sense.
Hedge funds are history, the same as Fraud Street.
That's why Jeff Macke quit. http://www.marketwatch.com/story/why-im-closing-my-hedge-fund
That, and then the public meltdown on CNBC probably ruined his career.
He quit more than five years ago. The story's dated 2004.
so are most of the industry's portfolio marks...........
If you think sitting on a megayacht is the greatest achievement you can hope for, your priorities are screwed up.
Carl Fox: Stop going for the easy buck and start producing something with your life. Create, instead of living off the buying and selling of others.
Financial intermediaries should be just that, simple intermediaries, just like utility companies. All this fancy accounting amounts to so much skimming of profits off the productive economy and redistribution of hard earned income via asset inflation and financial manipulation. The very idea that the typical retail investor has to use an intermediary, say Fidelity, which uses an intermediary, say a REIT portfolio manager, who uses an intermediary, say Hedge Fund number 5000, which uses an intermediary, say Goldman Sachs to purchase interest in some CDO, which contains underlying mortgages purchased from Wachovia and vetted by Moodys etc. etc. etc. Does anyone really know what is going on?! This is investing?! This is productive?! This is the free market at work?! Used to be Roman investors put their money in Egyptian cotton, Venetians in spices from the Ottomans, the British in India tea or American railroads and Americans in steel or autos. Now, who knows what the investment is, who the owner is, what the legal ramifications are or whether you will ever see a return. One day Apple is $200/share, six months later $86/share, six months later $207/share. Did anything change? And we think the Soviet Central planners were bad. Please, the sooner all the hedge funds and mutual funds (they used to be called bucket shops) collapse under their own confusion, incompetence and inefficiency, the better.
You stated that beautifully!
Well there is $1,000,000 he spent on his office:
http://www.thedailybeast.com/blogs-and-stories/2009-01-22/john-thains-87...
Amen.
Re: Anon #202099--- You hit the nail right on the head. American capitalism and domination has shifted to China, a quasi-communist hybrid with the second largest economy in the world, and gaining on our pathetic arses quickly.
A Nation of middle-men ala 1980's Japan, and we are just beggining to see the consequences.
Cry me a river, Madness. Always the selfish and greedy who cry foul when compeled to pay their fair share of taxes. Disgusting.
Honest question. I understand why you want your performance bonus taxed at 15% rather than 35, but why do you deserve it? It is ordinary income. You provide a service to clients, they agree to pay you for it and the product of that arrangement should be recognized as income and taxed accordingly. I'd love to hear a convincing argument against what seems like a straightforward issue.
Anon, I was going to ask the same question! I saw the topic and author and thought it was the perfect place. I hope he responds to you.
Why does a guy managing a McDonald's making $120,000 a year pay 35%, but a guy managing a hedge fund/private equity fund making literally hundreds of millions a year pays only 15%?
Both salaries come out of money that otherwise would have been somebody else's capital gains.
It's not regular income, though, is my understanding. It's performance-based, and the risk of getting "0" is higher.
In reality, to make it more fair, it would seem that the "2" of the "2 and 20" would be taxed as regular income, and the "20" would be taxed at the capital gains rate. Additionally, reguar "W2" workers should be taxed at the income rate for regular pay and the capital gains rate for non-guaranteed bonuses. THAT seems fair to me.
The same holds true for promote structures in commercial real estate joint-ventures. The promote is taxed at the capital gains rate, and that could be a casualty of the changes in tax rates for other private-equity ventures (hedge funds).
Is tip income taxed at a priviliged rate? That's performance-based, and bears a risk of getting "0".
Cash is mostly taxed at a 0% rate...
In all seriousness, maybe they should be taxed at a lower rate. My other question would then be - how many people actually leave a 0% tip if the service is bad? I've only done it once in my lifetime.