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Will The Real Smart Money Please Stand Up?

Leo Kolivakis's picture




 

Via Pension Pulse.

Peter Cohan of DailyFinance asks, Hedge Funds Bet on Inflation, Institutions Bet on Deflation. Who's Right?:

The
smart money -- by which I mean hedge funds and institutional investors
-- is placing its bets outside of the stock market. But the smart
money isn't by any means in agreement about the direction of those
bets: Hedge funds are doubling down on big inflation down the road by
buying gold. But institutions are buying corporate bonds -- a wager on
deflation, since bonds grow in value as prices and interest rates fall.

The
only thing they do agree on is that neither group wants to invest in
stocks. But should you follow them? And if so, which way?

Hedge
fund honchos such as George Soros, Leon Cooperman, John Paulson and
Erich Mindich are making big bets on gold because they see the specter
of inflation ahead. Bloomberg reports that Mindich's $13 billion Eton Park Capital Management bought 6.58 million shares of SPDR Gold Shares (GLD)
-- an exchange-traded fund that tracks the price of bullion. In that
gold trade he joins Paulson -- operator of a $31 billion fund -- who
personally made $3.7 billion in 2007 betting on the subprime mortgage meltdown.

Meanwhile,
institutional investors who are tired of getting beaten up by their
clients -- who are themselves tired of paying big fees for weak
performance -- are starting to creep out a little further on the
risk-return frontier from buying U.S. Treasury bonds to scarfing down
blue-chip corporate bonds. According to Fortune, 10-year notes for Johnson & Johnson (JNJ) yield 2.95%, a mere 0.43 percentage points more than comparable Treasurys.

Yet
institutions are clamoring to buy them, and companies are happy to
lock in the cheap capital. What strikes me as interesting is that
institutions are willing to pour capital into those low-yielding bonds
when J&J's stock sports a much higher 3.69% dividend yield
(dividend/stock price). This suggests that institutions are still too
scared to buy stocks.


Common Stocks: The Bottom of the Liquidation Hierarchy

These
times are heaven on earth for those in the bond trade. As PIMCO honcho
William Gross told me in February 2009 -- a few weeks before the
S&P began its 49% rise from around 735 to its current 1,098 -- we're
in an era where owning stocks is pointless.
He made an interesting argument: With slow economic growth, it makes
no sense to take the risk of being at the bottom of the so-called
liquidation hierarchy.

When a company files for bankruptcy, its
bank lenders get first dibs on the proceeds from selling the company's
assets. If there's any cash left over, it goes to bondholders, then
preferred stockholders, and last of all to the people who hold the
company's common stock. Gross argued that investors are better off
buying bonds because with a reasonable risk of bankruptcy, such
investors will be better off than stockholders.

This is a great
argument -- except for the fact that it has proven to be wrong
recently. And the odds of companies going bankrupt seem to be
diminishing. Corporate America is in a cash-hoarding mood, holding $1.84
trillion according to the Federal Reserve. And since these companies
can now lock in extremely low long-term borrowing rates, their balance
sheets have been buffed up even as their common equity is out of favor
with investors.

Can They Both Be Right?

One
thing seems to clear to me: The gold bugs and hedge funds betting on
inflation and the institutions betting on deflation can't both be right
at the same time. It's conceivable that the institutions could be
correct in the short and medium term, while the gold bugs end up being
right in the long term.

Let's face it -- those hedge fund guys
are the smartest and richest in the investment universe. But all the
statistical evidence I've seen says inflation is dead and is staying
buried despite the 140% increase in the U.S. national debt since 2000
from $5 trillion to $12 trillion.

Maybe the hedge funds buying
gold are momentum traders -- in that case they're buying because
everyone else is buying, and they're betting that they'll be smart
enough to get out before that buying turns to selling.

It
does strike me as odd that institutions keep piling into corporate
bonds, but fears of deflation persist and with so much cash at hand,
default risk has fallen dramatically.

One thing I don't like is how the article is slanted towards "hedge funds betting on inflation". Sure,
some top hedge funds have increased their holdings SPDR Gold shares,
but others have been busy buying many other sectors. I spent my day
going over what the top hedge funds have been buying and selling. I pay attention to major increases in positions, and it's definitely not all about gold.

As
I stated in my last comment, hedge funds tend to buy and sell often in a
quarter, but they do hold core positions. James Altucher reports in the
WSJ, What Funds That Bought POT Are Also Buying:

Potash
(POT) is up a massive 30% today on the heels of a $38.56 billion
unsolicited takeover bid from BHP Billiton. POT was listed in my top ten picks for 2010 at the beginning of this year. My quote from that article:

 

“People
need to eat. Potash increases the yield of fertilizer. And in an
overpopulated world with people moving into urban areas (less farmers
feeding more mouths), demand will spike for whatever can increase that
yield. Potash’s stock is closely correlated to prices of the product
Potash.”

 

Some great value investors have been buying up shares of
POT in the past quarter and its worth taking a look at other positions
they’ve been buying:

 

Mohnish Pabrai,
a known hedge fund manager who fashions himself after Warren Buffett
(even his fund is structured legally the same way Buffett structured
his partnership in the 50s and 60s) bought shares of POT in Q1. In the
quarter ended 6/30 Pabrai’s biggest added position was to the “Canadian
Berkshire,” Fairfax Financial (FRFHF).

 

Renassance
Technologies, perhaps the most successful hedge fund ever, owned $44
million of POT stock as of their latest filing. Other holdings they
increased this past filing include: Microsoft (MSFT), Medtronic (MDT),
and BP (BP).

 

One fund I’ve never heard of, Mak Capital, not only
added POT as a new position in Q1 but it became quickly their largest
position in their $400 million in holdings. They are probably having a
party today. Other top positions of Mak Capital include THQ (THQI) and
Mosaic (MOS).

 

When a hedge fund adds to a position like POT, or
makes it the top position, you have to assume they’ve done enormous
digging. This, of course, is not always the case, but with successful
funds it generally is. That’s why its worth checking out what other
funds have been buying POT and the stocks they’ve been accumulating.

Unlike pension fund or mutual 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.

Most
hedge funds deliver leveraged beta, but the top hedge funds are worth
tracking. They're typically (but not always) way ahead of the retail and
institutional funds. So when the WSJ reports that some big hedge funds have taken a liking to mortgage insurers in recent months, you should pay attention and ask yourself why.

Other big funds are paring back on stocks. Reuters reports that Harbinger's Falcone trims stock holdings:


Hedge
fund manager Philip Falcone slimmed his stock portfolio by eliminating
at least a dozen names and dramatically paring his top holding, a new
regulatory filing shows.

The New York-based hedge fund
manager, who is staking his reputation on a big bet that he can build a
high-speed wireless network, eliminated stocks like Clearwire Corp (CLWR.O). and Mercer International (MERC.O) in his Harbinger Capital Partners Master Fund I.

 

Falcone also pared back Citigroup (C.N),
which had been his biggest holding with 70 million shares in the first
quarter, and cut telecommunications company Sprint Nextel (S.N).

 

At
the end of the second quarter, the filing shows that he owned only 35
million shares of Citi, which has been remaking itself since being
rescued with $45 billion in government bailout money. He also reduced
his stake in Sprint to 35 million shares from 49.6 million shares.

 

During
the quarter, Falcone owned 16 million shares of Palm Inc, having first
announced his purchase days before computer maker HP agreed to buy the
personal digital assistant manufacturer.

 

Falcone, whose strong
returns last year helped earn him a spot as one of the industry's
best-paid managers, also added 25.8 million shares of Spectrum Brands (SPB.N), known for selling everything from pet care products to small appliances like the George Foreman grill.

 

Recently he pledged 12.9 million of those shares as collateral for a $400 million loan he raised with the help of UBS.

 

Cameron International (CAM.N),
a manufacturer of oil and gas pressure control equipment, including
valves, wellheads, controls, chokes, blowout preventers, also appeared
in Falcone's portfolio with 7 million shares.

 

Many other hedge fund managers made bets on energy companies whose shares had been depressed after BP's (BP.L) Gulf of Mexico oil spill.

 

Falcone
has been one of the hedge fund industry's most closely watched managers
since a savvy bet in 2007 that the U.S. housing market would collapse
and that mining companies would gain, earned his investors a 116 percent
return.

 

Since then, he has seen some
ups and downs. His flagship fund was off roughly 10 percent through the
middle of July of this year after having gained 46 percent in 2009. In
2008 he posted a 22 percent loss.

 

Money managers like Falcone
who invest more than $100 million are required to file form 13-F within
45 days after the end of each quarter. The forms include only
U.S.-listed equity securities and related derivatives. Bonds, other
securities and short positions are typically not disclosed. Managers
may also leave off U.S.-listed equities they own under certain
circumstances or file some holdings on confidential filings.

 

For
instance, in the case of Falcone, much of his funds' more than $2
billion investment in a wireless telecom company called LightSquared is
not reflected in 13-F filings.

Finally, Mr. Falcone isn't the only one paring down stocks. Zero Hedge posted an excellent interview with hedge fund manager Kyle Bass who was quoted as saying "I don't know how I can be long stocks".

You may recall Mr. Bass was quoted back in February in a Forbes article on The Global Debt Bomb:

Kyle
Bass has bet the house against Japan--his own house, that is. The
Dallas hedge fund manager (no relation to the famous Bass family of
Fort Worth) is so convinced the Japanese government's profligate
spending will drive the nation to the brink of default that he financed
his home with a five-year loan denominated in yen, which he hopes will
be cheaper to pay back than dollars.

 

Through
his hedge fund, Hayman Advisors, Bass has also bought $6 million worth
of securities that will jump in value if interest rates on ten-year
Japanese government bonds, currently a minuscule 1.3%, rise to
something more like ten-year Treasuries in the U.S. (a recent 3.4%). A
former Bear Stearns trader, Bass turned $110 million into $700 million
by betting against subprime debt in 2006. "Japan is the most asymmetric
opportunity I have ever seen," he says, "way better than subprime."

 

Bass
could be wrong on Japan. The island nation (and the world's
second-largest economy) has defied skeptics for so long that experienced
traders call betting against it "the widowmaker." But he may be right
on the bigger picture. If 2008 was the year of the subprime meltdown,
2010, he thinks, will be the year entire nations start going broke.

 

The
world has issued so much debt in the past two years fighting the Great
Recession that paying it all back is going to be hell--for Americans,
along with everybody else. Taxes will have to rise around the globe,
hobbling job growth and economic recovery. Traders like Bass could make a
lot of money betting against sovereign debt the way they shorted
subprime loans at the peak of the housing bubble.

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).

But before you
actively short JGBs or the yen, remember Mr. Keynes' famous quote: "The
market can stay irrational longer than you can stay solvent". I've seen
many "star" hedge fund managers succumb to the market because they were
absolutely convinced they were right and the market was wrong.
Unfortunately, no matter how "smart" the money is, the market always
dictates the terms of the trade.

Part 1:



Part 2:



 

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Wed, 08/18/2010 - 10:26 | 528040 ZackAttack
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.

Thu, 08/19/2010 - 05:21 | 529824 Hephasteus
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.

Wed, 08/18/2010 - 10:23 | 528029 ElvisDog
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.

Wed, 08/18/2010 - 10:38 | 528068 ZackAttack
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.

Wed, 08/18/2010 - 10:28 | 528041 SheepDog-One
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.

Wed, 08/18/2010 - 10:45 | 528080 ElvisDog
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?

Wed, 08/18/2010 - 10:16 | 528014 Silversinner
Silversinner's picture

A good pension porfollio would be

25%stocks

25%PM

25%bonds

25% real estate

and then re-ballance everey 1_5years

but stupid money forgot PM.

Wed, 08/18/2010 - 14:31 | 528679 MrSteve
MrSteve's picture

see the Permanent Portfolio's (PRPFX) allocation:

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

Wed, 08/18/2010 - 09:58 | 527967 Silversinner
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.

Wed, 08/18/2010 - 09:27 | 527922 Silversinner
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.

Wed, 08/18/2010 - 10:06 | 527932 Leo Kolivakis
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.

Wed, 08/18/2010 - 09:23 | 527915 Dismal Scientist
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 ?

Wed, 08/18/2010 - 10:15 | 528011 Oquities
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.

Wed, 08/18/2010 - 09:04 | 527886 primefool
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.

Wed, 08/18/2010 - 09:03 | 527884 SheepDog-One
SheepDog-One's picture

'Smart money', now thats funny!

Wed, 08/18/2010 - 08:30 | 527844 snowball777
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?

Wed, 08/18/2010 - 08:47 | 527864 Leo Kolivakis
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.

Wed, 08/18/2010 - 08:11 | 527829 Internet Tough Guy
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.

Wed, 08/18/2010 - 08:39 | 527856 Leo Kolivakis
Leo Kolivakis's picture

ITG,

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.

Wed, 08/18/2010 - 10:01 | 527979 Nout Wellink
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.....

Wed, 08/18/2010 - 09:58 | 527969 Nout Wellink
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%?

Wed, 08/18/2010 - 09:38 | 527933 Internet Tough Guy
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.

 

Wed, 08/18/2010 - 10:08 | 527992 Leo Kolivakis
Leo Kolivakis's picture

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

Wed, 08/18/2010 - 09:26 | 527918 whatsinaname
whatsinaname's picture

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

Wed, 08/18/2010 - 08:18 | 527828 Astute Investor
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.

Wed, 08/18/2010 - 08:35 | 527850 Leo Kolivakis
Leo Kolivakis's picture

Astute,

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.

Wed, 08/18/2010 - 09:08 | 527879 Astute Investor
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.

Wed, 08/18/2010 - 09:13 | 527897 Leo Kolivakis
Leo Kolivakis's picture

Astute,

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.

Wed, 08/18/2010 - 09:39 | 527934 Astute Investor
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.

Wed, 08/18/2010 - 09:44 | 527944 Leo Kolivakis
Leo Kolivakis's picture

And what about clawbacks?

Wed, 08/18/2010 - 10:25 | 528034 SheepDog-One
SheepDog-One's picture

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

Wed, 08/18/2010 - 10:09 | 527993 Oquities
Oquities's picture

leo,

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.

Wed, 08/18/2010 - 10:35 | 528061 Leo Kolivakis
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?

Wed, 08/18/2010 - 23:21 | 528246 Astute Investor
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.

Wed, 08/18/2010 - 09:59 | 527973 Astute Investor
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).

Wed, 08/18/2010 - 08:11 | 527823 Bruce Krasting
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.

 

Wed, 08/18/2010 - 09:29 | 527924 ZackAttack
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.

Wed, 08/18/2010 - 08:43 | 527859 Leo Kolivakis
Leo Kolivakis's picture

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

Bruce,

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.

Wed, 08/18/2010 - 10:23 | 528031 chrisina
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.

Wed, 08/18/2010 - 09:43 | 527943 Internet Tough Guy
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.

Wed, 08/18/2010 - 09:16 | 527904 Otherspeoplesmoney
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.

Wed, 08/18/2010 - 09:14 | 527899 whatsinaname
whatsinaname's picture

In the end we all lose thanks to the Fed.

Wed, 08/18/2010 - 10:18 | 528018 Widowmaker
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."

 

Wed, 08/18/2010 - 01:24 | 527646 Economic Darwinism
Economic Darwinism's picture

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

Paraphrasing:

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

Wed, 08/18/2010 - 09:55 | 527962 Nout Wellink
Nout Wellink's picture

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

Wed, 08/18/2010 - 11:59 | 528260 RockyRacoon
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.

http://www.lewrockwell.com/orig11/weber-c1.1.1.html


Wed, 08/18/2010 - 14:21 | 528640 MrSteve
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?

Wed, 08/18/2010 - 09:26 | 527920 ZackAttack
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. 

Wed, 08/18/2010 - 10:15 | 528005 Widowmaker
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.

Wed, 08/18/2010 - 00:19 | 527597 NoVolumeMeltup
NoVolumeMeltup's picture

Well that told me exactly shit-all.

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