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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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How about the fact that ALL taxes are nothing but loot and pillage? That enough "convincing argument" for ya? Of course, if you think otherwise you are free to bend over for our dear government and give 'em all your income as tax.
Clearly anonymous is asking the question under the assumption that nobody wants to go to jail for tax evasion. Whether one wants to pay taxes or has the means to influence the taxing body would be irrelevant. How can the lower tax rate for hedge fund performance bonuses be justified? And your avatar isn’t creative.
No. Your argument that all taxes are looting says nothing to the fact that some looting is more equal than other looting. Please provide justification for priviliging this type of income over my regular W-2 paycheck.
He has a competive spending advantage over the government.
Prop desks are all but dead if yesterday's announcement comes to fruition. Most cannot exist without the information deal flow.
Expect the good and the not so good (but think they are God sent) traders setting up hedge funds simply because they do not have another profession (come on, after years in investing, you must have the attention span of a rabbit, quite umarketable).
Sounds like sour grapes from someone who can't raise the big money. And pity you resist your ordinary income being taxed at capital gains rates. I hear violins....
A buddy of mine working at a prop desk was offered to start his own hedge fund. I told him to stay where he was. The terms of the deal were laughable, and the environment for new start-ups is very hostile. Of course, if you think you can offer institutions real alpha with transparency and liquidity, then go for it, but I warn you, the old model of charging 2 & 20 for leveraged beta is all but dead.
As usual only half the story without the benefit
of the terms of the deal how do we know your advice
was right? You are not the only sailor in the sea other
people are capable of critical thought. Lastly
everyone knows gross margins for the average fund out there will be squeezed due to lack of pricing power. Tell us
something we don't know. Telling your friend to
stay put until the dust settles would have sufficed.
and you guys are accusing Leo of being repetitive?
you need to get checked for stalking and OCD.
if you don't like him skip him.
jeez.
unless you're any good.
Excellent satire. Better than the joke columns in WSJ.
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.
MHFT - Sounds like you have joined the ranks of the UAW. OK. Not right. Especially for someone that can appreciate Carmel Valley and a nice time in SF while enjoying commercial success. Actually, over the past 100 years or so when did the actions of the US government ever make any sense in their totality? No small wonder so many are uneasy with the challenges that face society and how they will or won't be addressed. BTW, the next time you find yourself in the Monterey area enjoy a nice meal at Fandango which is located in my families former long term home.
I think it would be best for everybody on the planet if the US Government goes quietly into that good night. I don't think anybody - except the most criminal among us - would miss it.
And the decision will either be presented as a fait accompli to "restore" American governance to the founding documents and premise or we face the strong potential of the gamut from the First French Republic to the Third. Good to see ya GG.
USA needs a shareholders' revolt.
This Atlas has been shrugging since Obama's first month in office. I refuse to generate tax revenues while these criminals are occupying the White House and Congress.