Hedge Funds Turn to Gimmicky Promotions to Keep Investors as Their Inability to Ever Beat Any Benchmark Becomes Apparent
NEWYORK – With June turning out to be an ugly month across most financial markets, Hedge Funds are once again losing money. The losses come on top of the industry’s already weakening reputation thanks to back to back years of underperforming major benchmarks. To try to keep their investors from leaving, many funds are turning to promotions usually reserved for far less glamorous industries.
Some fund managers are cashing in on their own “Masters of the Universe” mystique by offering investors tours of their trading floors, invitations to golf outings and tickets to watch poker tournaments. As Mark Arlett, manger of the multi-billion dollar River Ridge long/short fund told us “Even though the stock market is still up on the year, our funds are down. To keep my investors excited about the future with our firm, I flew a bunch of them down to Atlantic City to watch me play poker. I placed 2nd in a tournament and took home $50,000.” Asked how this served the interests of his investors, Arlett replied “nothing makes an investor feel more confident in their fund manager than seeing the guy’s ability to make himself richer.”
Others geared their promotions to reflect their fund’s strategy, as explained by Ron Patel of the Value Seekers Fund. “Our investors invest in a value fund because they believe in finding diamonds in the rough. Since our fund has gotten killed with the value stocks we bought near all time highs earlier this year, I decided to offer a promo that makes our fund look more valuable than other hedge funds. So anyone that invested an additional 5 million dollars in the fund gets their fees reduced to 2 and 19, on the last million.”
Famed manager Eddie S. Lambert of the humbly named ESL Investors has tried a more radical approach. Lampert has given his investors a piece of one of the fund’s major holdings, by distributing shares of Autonation. Some critics have questioned why anyone would invest in ESL in the first place, since 90% of its holdings can be replicated by buying just 5 stocks and without paying the hefty fees that have made Lambert a billionaire. We tried posing these questions to Lampert himself, were not able to reach him, as our calls to ESL’s client relations number kept being forwarded to the Sears Layway department.
Stevie Cohen’s troubled SAC Capital Advisors currently has no promotions in place. However, a few of the funds investors told us that last year Cohen had told them he was setting up a an exclusive client newsletter, only to abruptly cancel the idea. The newsletter was to be called the “Information Insiders Edge.”
Not all experts agree that such promos are necessary. Hedge Fund lawyer James Kaplan, from the respected Wall Street law firm of Kaplan, Wolf and Dubois told us that fear of redemptions is no reason to change what you are doing. “If any hedge fund investor actually reads a fund’s subscription document and PPM, they would see that theoretically the fund never has to give anyone their money back. They just have to declare a liquidity crisis and throw up a gate. Nobody ever complains about that language anyway. Honestly, judging by the correlations to the market, the ridiculous fees and the lack of transparency, its not like any sane person would actually invest in a hedge fund for a financial reason anyway.”
Source: Omid Malekan via OmidMalekan.com [6],