Beefy yet not unreasonable, if they are good.
Money Managing in an uncertain & fast changing world, todays realities. My top choice at what the next high growth sector is and two stocks I like.
Hedge funds are a legitimate avenue/choice to cautiously consider for some large investors and it pays to understand these better. Today I review this again after writing about this 3 years ago.
Everyone knows hedge funds have had dramatic growth over the past 10-20 years. Assets under management here have soared from 58 Billion US$ in 1991, to over the 1 Trillion US$ mark by the first Q. of 2005. In Asia there were some 160 such funds at year 2000, now there more then 600, managing a combined 70 bill US$, vs. less then 20 Bill US$, just 6-7 years ago.
What is less understood is how volatile -besides versatile- the hedge fund industry really is and has become.
There are hedge funds which only go short securities, there are funds which are "market neutral" (i.e. try to establish a return regardless of what the benchmark does). There are funds that bet on interest-rate and currency movements, make long and short wagers on stock and oil prices, and seek to exploit bond market inefficiencies and much more… certainly it's a rage now . Hedge funds were also blamed for the run on Thailand's baht in 1997. The Baht was the only Asian currency for which the hedge funds collectively took significant short positions back then.
Today just half of hedge-fund money is in long-short funds, with the rest in riskier areas. Those include commodity pools, which bet on swings in commodity prices; arbitrage funds, which seek to exploit inefficiencies in the bond markets; and macro hedge funds, which try to predict macroeconomic events such as movements in interest rates and currencies. You can see the broad diverse, almost perverse, industry.
Brief, there is a fund out there for just about every season and investor theme…more then a few have gone belly up at times inducing a broad market correction. Some have been fraudulent were the managers made up professional resume's and track records and or disappeared with the money. In late June a billion dollar fund folded and rocketed the Dow Jones down some 180 points. Hedge funds escape most regulators as they are designed for "the rich and wealthy" and so supposedly these should know how to protect themselves without the regulators' mingling. Investor beware is the watchword.
Many if not most funds have leverage and derivatives, making it often difficult to gauge what level of risk they are taking. When a hedge fund manager tells me of a return achieved I always ask the key question what degree of leverage and/or what derivatives were used. Leverage and derivatives is the devil which hides in the details, by not showing the true risk taken for the returns stated.
3 years ago I wrote a rather critical member article about Hedge Funds you can see this here:
Here is an excerpt:
" Casanova's of the Fund Business"
"In 1990 there were 600 US hedge funds in business. There are now over 6000 and some 900 are not even 1 year old. More than 10% tracked by HedgeFund.net in the past year alone are already defunct. Individuals, Pension funds, Endowments and Foundations all are signing-up like never before. Are you? Should you? Think & analyze carefully….
"…Hedge Fund fee cuts are often around 20% of all profits earned during a given period. In addition, there is frequently a 2% annual management fee on assets managed. This take is on top of an administrative fee, often 0.4 to 0.8%, per year. If the fund performs for a while, the profits are split with the managers, if later the fund totally bombs out, nothing is given back. Being on margin will bomb you out a lot faster, if the markets turn on the fund. So called derivatives or hedging strategies are often camouflaged into being called "insurance". It's insurance until it does not work and often it fails, as history has shown. There are derivative speculative vehicles on just about anything these days, including the weather."
Hedge funds typically charge 1-2% annual management fee of the funds under management in addition they take a 0.2 to 0.6% annual administrative fee. If they make money they take 20% of the profits as of a set valuation date. These fee structures are not really negotiable as they are the industry standard. Sometimes if there are looses they just close the fund down so to wipe the past bad record, and start new. (Its called eliminating the high water mark).
Then there are so called funds of funds, these are related service companies which only analyze and track hedge funds and their reputation/history performance etc.. they then, after evaluating their clients needs, will recommend certain funds which meet the objective/reputation and style sought after by the investor. They so then usually charge a further 10% fee on top of the fund as well as a percentage of the gains. It is not unusual to for example if a fund produces a 40% return in a year, the net to the client is around 25%, or even less. A big bite indeed. Fund of funds are appropriate for large unsophisticated investors (like a Hollywood or Football star) which has no clue what to do.
One thing to remember is that a hedge fund is a pooled entity where the clients money goes into one large "kitty' and then is so invested. The client has no say and there is no individual tailoring. There usually is a lock-up period where the client cannot withdraw any funds and the asset value is declared quarterly, monthly or less frequently. Some of the more successful (historically anyway) funds do not allow the investor client to ask many questions -nor meet with the senior managers.
A Thai example
Quest Fund (QuestThai.com) is one lonely hedge fund focusing only on Thailand. Their performance has not been very good in recent years (less then the meager SET index), one problem is possibly because they are now just too big (300 mill US$ under management) and so must focus on larger cap shares. For their latest shown returns see: http://www.questthai.com/2006perf.html For this year they are up 14.5% so far, less then half that I believe which I have demonstrated to members here.
Yet, as I analyzed their medium term returns their fund showed no progress whatsoever over the past 3 years. Quest Fund charges a 1% fee and 20% of the profits, the administrative fee is not readily disclosed. To my knowledge, most of the time of the senior fund manager (owner) is marketing his fund for new clients around the region and in Europe.
Yet there are a number of highly successful hedge funds and well worth the fee and a better possible alternative then a plain Mutual Fund which is more suitable for small time investors. The real interesting core of this is that at some point larger investors can identify a fast growing new industry where the best way to invest is with an astute and highly knowledge pro's whom run a hedge fund in that very promising/emerging industry.
One thing to be on guard is that hedge fund managers sometimes get to close to the companies they invest in, and so forget -or more like get confused- where their loyalties should be. While the incentive is strong to earn the 20% bonus, they get nurtured into a relationship close to the managers of the stocks they pick, vs the investors whom are their clients. Group think and other fallacies/biases/twists can and do so occur to the detriment of their true clients; not the least being that the fund spends too much time marketing rather then analyzing companies.
Hope this helps understanding better Hedge Funds which at some point will no doubt come up as a prominent alternative to larger investors/member needs.
The fee charged by hedge funds are not unique or this industry standard as some believed, they are the general standard for money managing. Individual managed accounts charge a similar fees with the key difference being:
Hedge funds co-mingle all their funds (pooled) vs. an individual managed account is managed directly for the client. This is the purest more direct form of investing and has key advantages. Further, the capital stays always in the clients name vs. a hedge funds where deposits are co-mingled along with all the other investors. Furthermore, hedge funds spend lots of time continuously marketing their fund as realize, the top asset manager is usually the only one qualified to market his fund, and yet he is the one whom should be busy managing the money day by day!
Hedge funds cannot invest in smaller cap Thai value shares, as most all manage money of at least 200 million US$ so its clearly impossible to invest in this class of desirable smaller cap stocks which yet have been the proven SET performers for many years and likely to be in the future for all the reasons well explained elsewhere. Realize that if such a fund wanted to take advantage of these high yielding value & growth stocks all in one, they would have to invest many millions of US$ per stock, which is just not realistic with the average volume levels these shared trade by.
***
Moving forward I see much new incremental Thai infrastructure and construction spending going into year 2008. There is huge catch up here and low interest rates only fuel this further. SE Asia and Thailand in particular have grossly neglected the investment side since the Asian crisis of 1997 (10 years!) and here I don’t mean FDI, but investments by governments and private companies.
This is one reason I am/remain bullish on TIES (3.02) and TRC (3.42) and so these remain my two key investment grade smaller cap picks, no doubt off the radar screens of institutional investors. Earnings growth stocks with high dividends in an industry bound to show substantial momentum moving forward post Thai elections.
Sino thai STEC (6.60) Whose pictures you see here would be my large cap pick for this sector. Beware this stock is price volatile, as most larger cap SET shares, so be on the look-out to consider it on a price correction.
If there is a market correction which as stated last week I am sensing now, I would view this as good time to buy more, after advocating these 2 at already lower levels.
From July 10 to early August I am taking a much needed Holiday. The first in many years.
Best Regards to all members.
Paul A. Renaud.
Are money managers over compensated?
A few years ago USA's prestigious Harvard University paid their money managers 35 Mill US$ in annual fees, so to manage their 20 Bill US$ University endowment fund. Later some of the Alumnies & academics, professors wrote letters hugely complaining about this big and unreasonable compensation. The fund managers rightly pointed out they made them (as I recall) 3.4 Bill US$ in net gains that year.
Still, various high ranking academics were outraged and persisted in their complaints at this large compensation for a small team. And so again asked them to please reconsider. The fund managers told them "no", then resigned as a group and weeks later started their own Fund, with immediate success and the standard 20% bonus on the gains. Since then Harvard's' endowment funds to date never achieved anywhere this return, as they lost their top talent. Some estimate this cost them at least 1 billion $ or probably more in lost returns the following 2 years alone.
There is a similar story with Yale University, where after 150 years of meager returns due to over prudence, Yale for some time in recent years has one of the best money mangers in the world. Modest Mr. David Swensen made a huge difference to their large endowment fund, but it took them 150 years to realize that this makes all the difference.
"The best investment returns are often found in some of the darkest corners of the world" David Swensen
