Will The Real Smart Money Please Stand Up?

Leo Kolivakis's picture

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ZackAttack's picture

I don't see why people view it as a binary outcome. The evidence of the last few years is that what we have is biflation: inflation in the things you need, deflation in the things you possess.

Hephasteus's picture

Inflation in the things you need. Massive deflation in Art, expensive cars. yachts. Beach houses.

It's just seeming more and more apparent that it's moot now. As the central bank has become more and more centralized the natural deflating action and bank crashing as individual entities is turned into a facist bundle. It all goes on government debt sheet, it all ends up on fed balance sheet. It all works or it all crashes together.

And yes it's never a binary outcome in all asset classes. Crashes are caused by crises events. The needs of the crises dictate the movements. Food is going to inflate no matter what. Paper is going to inflate no matter what. Energy is going to get choppy because international tensions will drive incredibe energy security fears.

ElvisDog's picture

Leo is right about one thing - collapses are rare and investing based on a stock market collapse is a long-shot bet at best. What is more likely is a Japanese-style situation where the stock market flops around in a disappointing trading range for many years. However, this situation is equally poison for pension funds who are basing their payout models on an 8% real annual return.

ZackAttack's picture

Market goes up 80% of the time. You're betting against the odds being net short all the time.

Even when there is a crash, it always, always takes longer than you'd imagine to play out.

Doesn't mean there's not a reason to hedge your trade though.

SheepDog-One's picture

'Collapses are rare' only to cottoncandy brained americans who think 'it can never happen here, we're spoiled rotten americans nothing bad can ever happen to us' while in fact collapses are common.

ElvisDog's picture

Examples? I suppose it depends on your definition of a collapse. To me, a 20% down move is not a collapse. The "Flash Crash" was not a collapse. The S&P going from 1500 to 666 was a collapse, but how often does a 60% down move happen in the stock market?

Silversinner's picture

A good pension porfollio would be




25% real estate

and then re-ballance everey 1_5years

but stupid money forgot PM.

MrSteve's picture

see the Permanent Portfolio's (PRPFX) allocation:

stocks, bonds, gold, silver, Swiss franc stocks and cash.

Silversinner's picture

Like your writings Leo even me being a hardcore goldbug.

Took your advice on solar serious but bought it for my

own energy consumption 20-30 years ahead with it and

not made in China on them.Sometimes I play in the

casino to,when???When the markets get slashed and

the BB(big boys)anounce big liquid steroid $$$$$$$$

injection;put a little money in(c-options) and than cash out in gold

and silver.Just a differend way of thinking,I guess.

Silversinner's picture

In Holland they just sliced the montley payment of 15 private pensionfunds to their clients.Why???

Because the intrest rate is so low and these funds depend on intrest for calculating the future promises.

A lot of them were,are or will be forced to play in the casino.That's were they are the dumb money and

get riped off.Remember the pensionfunds were the last to sell in of crash 2008.

Leo Kolivakis's picture

Hold on a second. Pension funds are naturally long the market. Unlike hedge funds or mutual funds, they have to take a longer-term view on things. Many pension funds got toasted in 2008, others fared better because they got their asset allocation right in 2007. The ones that got hit the hardest are the ones that sold out at the bottom because they faced a liquidity crunch. Others kept on buying, and recovered some of those losses.

Dismal Scientist's picture

The 'smart money' seems to be loading up on everyone's favourite ETF ponzi, GLD. I thought consensus here was that this is an accident waiting to happen. Why are they doing it then ? To demand physical which can't be delivered, thereby boosting all their other gold positions ?

Oquities's picture

these hedgies can meet the big minimum physical withdrawal requirement, and maybe think they'll be the first out the door.  that or they are in for a trade, avoiding physical premium.

primefool's picture

It is possible that large, risk averse institutions that Do Not Have To Mark To Market - are the big buyers of bonds here. Look if you dont have to mark to market - a 2% sure yield looks like better career risk than taking your chances with stocks.
So all the really really dunb money is buying bonds.

SheepDog-One's picture

'Smart money', now thats funny!

snowball777's picture

So the 'smart money' charges 'big fees' for 'weak performance'?

Maybe smarter than their clients, but that's not saying much, is it?

Leo Kolivakis's picture

Smart money is a terrible phrase because at the end of the day, the smartest managers know they're not smarter than the market. It's all a relative game, even in hedge fund land where competition is fierce to attract and keep the best portfolio managers. Like I said, most hedge funds are not worth the fees they charge. True alpha is getting harder and harder to find in an increasingly beta dominated world flush with liquidity.

Internet Tough Guy's picture

Leo, just because hedgies are bidding up stocks doesn't make them smart. And just because you have big returns doesn't make you right. Who had better returns than Madoff?

It may look like you are getting rich betting on a ponzi, but when the ponzi goes, so do your illusory gains.

Leo Kolivakis's picture


That's a terrible argument. You can warn me about the "Great Collapse" till you turn blue, but my money is on Buffett and other great money managers. Their actions speak volumes, and if they're buying stocks, then it's safe to assume they don't share your feelings. People like you should be buying T-bills or gold bullion. All you see is "Ponzi" everywhere, but at the end of the day, you're severely underperforming the indexes. Period.

Nout Wellink's picture

Why are other great money managers slashing their equity holdings (Soros), building big positions in gold (Paulson, Soros and many others), bet on deflation (Gross, Shilling, Hendry, Shedlock and many others)?

Oh, BTW: if you had followed Buffett in 2008 - buying oil while it was exploding - you had lost a LOT of money.....

Nout Wellink's picture

Then why gold is up 300% in the past 10 years while stocks are flat? Why is gold ONCE AGAIN outperforming stocks in 2010? In what world are you living in: one that says that 0% is actually a better performance then 300%?

Internet Tough Guy's picture

Actually Leo, I have been buying gold bullion. I beat the indexes the last 10 years. How about you? The stock market is where it was 12 YEARS AGO.

You are a funny guy, so proud to have lunch with guys buying into a ponzi. Then you get all puffed up and call people ignorant because they don't believe your spin. You should be on CNBC.


Leo Kolivakis's picture

Good for you! I don't buy & hold, but do take concentrated bets on sectors when I have conviction.

whatsinaname's picture

You really dont know what Buffett's money is on..

Astute Investor's picture

Unlike pension fund managers, hedge fund managers have skin in the game. They're compensated on a 2% management fee and 20% performance fee and they are subject to a high water mark so if they lose big in a year, they have to recoup those losses before charging performance fees again.

This statement is categorically false, but not surprising coming from you Leo.  Having "skin in the game" for a hedge manager should mean having nearly all of your liquid assets invested side-by-side with your investors / LPs.  This is absolutely NOT the case at hedge funds and private equity.

Even with a high-water mark, a hedge fund manager never ever "loses big" in a year while the LPs are certainly subject to loss.  A perfomance fee (or carried interest for the GP of private equity) is nothing more than an OPTION with an asymmetrical return pattern.  The performance fee can never have a negative value (e.g. manager reimburses LPs for investment losses) so the maximum "downside" to the manager is zero (no loss).  Therefore, if the manager rolls the dice and hits a home run he will get paid a tremendous amount of money with no initial capital at risk.  If returns are negative, the manager can only rely on the 2% management fee and earn less.  In either case, there is no risk of loss so the manager clearly does NOT have skin in the game.  Alternative assets (hedge funds, private equity, etc.) is an OPM business.

Leo Kolivakis's picture


You really are not bright. Most hedge funds and PE funds -- the ones we invested with anyways -- had managers whose entire (or overwhelming) net worth was tied up in their funds. Also, unlike mutual funds, these funds have hurdle rates before they can charge performance fees. Before you spew nonsense here, do some homework, then come back to me.

Astute Investor's picture

Leo:  Thanks for proving once again that you are an empty suit by failing to refute the central theme of my post.  Given all of your self-proclaimed experience with hedge funds and PE, it's scary that you don't seem to undestand the definition of the word loss.  Yes, a number of hedge funds (and private equity) have hurdle rates, but that has nothing to do with creating skin in the game and RISK OF LOSS!!!  The hurdle rate is effectively a higher strike price on perfomance fee option.

While there are certainly funds that have managers who invest a majority of their assets side-by-side with their partners (a new hedge fund raising capital doesn't have a choice), I can tell you that this not the case for the brand-name, mega-funds.

The institutions you consult to should ask for a refund.  Fortunately, it doesn't cost anything to the participants on ZH to read your nonsense.

Leo Kolivakis's picture


I don't particularly like the current hedge fund or PE model, because most of them just become huge asset gatherers, collecting 2% management fee. In other words, it's all about salesmanship, not performance. Of course, you get huge dispersion on returns and there is perfromance persistence among top funds, which is why they're able to garner the bulk of the assets. I also like looking at smaller, hungrier players, but there are risks in that strategy.

One thing you keep repeating is that managers of mega funds don't have the bulk of their net worth tied up in the fund. I'd be curious to know how you know this as a fact. I've invested with the best of them, and can prove to you otherwise.

Bottom line: Hedge funds and PE funds are not perfect (never claimed they were), but if I had to invest my money with any money manager, I'd make sure we have alignment of interests. I want them to feel the gain and pain of their decisions.

Astute Investor's picture

One thing you keep repeating is that managers of mega funds don't have the bulk of their net worth tied up in the fund. I'd be curious to know how you know this as a fact. I've invested with the best of them, and can prove to you otherwise.

You shouldn't confuse large $$$$ amounts with bulk of net worth.  For example, a GP with a net worth of $2.0 billion invests $500 million (25%) in his or her fund.  Is $500 million a lot of money? Yes.  However, if the fund implodes the manager is still extremely wealthy.

I am an LP with eight different alternative asset managers.  In my career, I have worked with dozens and dozens of private equity and hedge fund managers.  The vast majority of their remuneration comes from management fees and performance fees and not from any LP interest.  Going back to my original point, management fees and performance fees / carried interest does not equal "skin in the game" because there is no downside (risk loss) - the maximum downside can never be less than zero.

SheepDog-One's picture

'Clawbacks'? FED will never 'claw back' anything, they can't! But keep moppin up the hype, Leo.

Oquities's picture


your responses to this guy are inane. simply to argue with his factual, logical post is futile.  yet you continue battling to a senseless whimper.  know when to stop.

Leo Kolivakis's picture

My response is inane? Ok, so let me ask you, if you had a choice to invest with money managers, wouldn't you prefer investing in someone who interests are aligned with yours?

Astute Investor's picture

Ok, so let me ask you, if you had a choice to invest with money managers, wouldn't you prefer investing in someone who (sic) interests are aligned with yours?

Of course.  Unfortunately, management fees and incentive fees are just that - compensation and incentive tools - but they don't align the GP's interests with LPs.  Again, this is due to no risk of loss, but only risk of forgone income for the GP.

There is no perfect solution unless (1) the GP purchases an LP interest for cash in an amount in excess of the $$$$ invested by any individual LP (GP would be the largest LP in the fund); (2) a much more modest incentive fee with a real hurdle rate indexed to a proper benchmark; and (3) a downward sliding scale for the management fee (e.g. the larger the fund, the lower the fee percentage) which should only cover salaries, operating expenses, etc. of the fund.

You might argue that such a structure would cause many managers to exit the business.  It's always a possibility, but someone else will inevitably fill the void.

Astute Investor's picture

Clawbacks are a protection for the LPs, but again it doesn't subject the GP to risk of loss (e.g. clawback can't be more than 100% of the dollars paid out in peformance fees / carried interest).

Bruce Krasting's picture

You make a point of how significant the gold holdings are of a number of hedge funds. I agree that this is a significant and curious development.


I think if you were to talk with some of these folks they would tell you that they own gold in big amounts because one of their concerns is a wipe out of fiat money. In that event gold might come in handy. It is not clear to me what would happen to equities should we have a black swan along those lines, but a good bet is that nothing good would come from it. Wealth destruction and $5000 gold.

You make the mistake of assuming that the investors you refer to are buying gold because they think that some massive inflation is in our future. I do not think that is right. There is no evidence that inflation is our problem, it is the opposite. Deflation is the greater risk.


So when you look at those gold holdings don't conclude that inflation is coming anytime soon. Just the opposite is happening. These gold holdings are there because even these big investors do not trust that we will make it through without a big implosion. In this case gold is a hedge against a very bad outcome.

Inflation may make gold go up someday. Today it is going up because people see the incredible folly of what is being done to sustain the "status quo".

Look at the Fed Leo. They are now doing "unnatural acts". That does not scare the hell out of you? It scares the hell out of me.


ZackAttack's picture

One thing I can tell you, those guys buying GLD are going to wind up holding lint. If it ain't physical, it ain't squat.

Leo Kolivakis's picture

>>Look at the Fed Leo. They are now doing "unnatural acts".


The Fed is an extension of the financial oligarchs. Get that through your head. They want to reflate risk assets and will do whatever it takes to reflate them. You can fight them, but you will lose. Guaranteed. On gold, you are right, it's not just about inflation. Will discuss this topic too.

chrisina's picture

"They want to reflate risk assets and will do whatever it takes to reflate them. "

Yep, and as long as it's that way you can be certain gold will continue to outperform equities.

The more they insist on reflating risk assets, the more risk assets will deflate when measured in ounces of gold.

Internet Tough Guy's picture

Leo, get it through your head, financial oligarchs don't care about your interests, or mine. They only care about theirs. If the stock market has been flat for 12 years and the elites have amassed huge fortunes, where are the customers yachts? Why can't you understand this? The stock market is only making the oligarchs rich.

Otherspeoplesmoney's picture

So is Kyle Bass right? I think he's wrong on stocks, as even Buffett was again a net buyer of stocks in the second quarter in marked contrast to the previous two quarters of heavy selling. Moreover, top hedge funds and banks' prop desks continue to bid up risk assets, but he may be right on Japan, and his views on pensions are definitely worth listening to (watch both parts of interview below).

That's your rebuttal to Bass?  I think he's wrong cuz the same prop desks that had their heads handed to them in 2008 are at it again. Sound strategy.

People who continue to think that the Fed bails out everyone will be proven wrong. For Punters like yourself who will arrogantly spew their confidence in nothing more than speculation will lose their shirts again. You may make some $ in the short run but you will give more than that back in time.  Ignorance like yours is expensive.

whatsinaname's picture

In the end we all lose thanks to the Fed.

Widowmaker's picture

We the savers, risk averse, and prudent decision-makers lose (yet again).

We the corporation dripping with fraud get a bonus and a slap on the back, "Mission Accomplished."


Economic Darwinism's picture

I like what Einhorn said when he started buying up gold.


Gold is not a hedge against inflation. It is a hedge against bad fiscal and monetary policy.

Nout Wellink's picture

Exactly. And gold is a bet against fiat paper (called money).

RockyRacoon's picture

When Americans gave up their gold back in 1933, they were paid $20.67 for each ounce they surrendered. If they had simply lost one of those ounces behind the sofa, today they could exchange it for over $1,200. But if they had taken that $20.67 and misplaced it until today, that amount of money would only buy what a mere $1.32 would have bought them they day they turned in their gold.

That's how well the dollar has held its purchasing power since 1933. And that's how well gold has held its.


MrSteve's picture

Hard to argue with mathematical, historical facts as RR details here. How long will it take for the next 94% of the dollar to disappear?


with the whole world piling into UST for safe harbor, what will be the reservoir of value when trillions of $$$ hit the global street?

ZackAttack's picture

Exactly. And the evidence is right in front of everyone. For 20 years until 2000, the US averaged 3% annual inflation. During that time, gold went from $800 to $250.

Nor is it a deflation hedge. In the long deflation after the civil war, it fell from $360/oz until the price was fixed at $20.

It's a proxy for a trustworthy currency. 

Widowmaker's picture

3% inflation?

HA!   Only if one excludes absolutely everything that inflated in value.

"REAL" Inflation (the kind people actually pay) has been double digits for over a decade.

I know, if we don't look it can be whatever we want... magic 8-ball says 3.

NoVolumeMeltup's picture

Well that told me exactly shit-all.