Forbes calls it, “The Sleaziest Show On Earth”. It is referring to the hedge fund industry.
“Hedge funds will suck in US$100 billion this year from an ever-broader swath of investors,” says the magazine. “Pretty good for a business rife with exorbitant fees, phony numbers and outright thievery.”
We are pleased to see the mainstream media catching on. Hedge funds are a great way for hedge fund managers to make money; they’re a terrible way for an investor to try to make money.
There are a lot more funds than there used to be – maybe as many as 9,000 of them. And a lot of these funds are being marketed to the lumpeninvestoriat. Now, rather than helping the rich lose money, they are helping the not-so-rich get into a serious jam.
“The unwashed masses can get into this volatile sideshow for as little as US$5,000…Among the 1,800 largest US pension funds, endowments and foundations, almost one-quarter held hedge fund investments last year, up from 12% in 2000. US pension funds plan to plow US$250 billion into hedge funds in future years, 20 times the amount of exposure they have now, says researcher Greenwich Associates. Calpers, the US$165 billion retirement fund for California state employees, has invested US$500 million and plans to double the sum.
“What is driving this red-hot industry: fees that would be outlandish or even illegal if extracted from a plain old mutual fund. ‘It’s obscene,’ says Alice Handy, who invested in hedge funds for over a decade while running the University of Virginia endowment. ‘The fee structure is so compelling that everyone and his brother wants to run a hedge fund now.”
The mainstream media is also beginning to understand what a racket private equity is. Moody’s attacked private equity this morning – noting that the PE firms add neither shareholder value nor value to the greater economic community. Supposedly, firms taken private are able to focus their investments on long-term objectives. In practice, the new owner’s outlook is very short-sighted, loading the company up with debt so they can pay themselves large fees, and hoping to get out of town before the posse shows up.
Markets and Money