The Hedge-Fund Investment Puzzle – Wall Street Journal 05-31-13

Salient to Investors:

Bob Rice at Tangent Capital writes:

  • Despite negative headlines, sophisticated institutions keep adding to their $2 trillion invested in hedge funds.
  • Benjamin Graham devised a way to make money regardless of market direction by buying a stock he liked, and simultaneously selling short one he didn’t.  Over the past 30 years of highly volatile markets, Graham’s approach has returned 5 times as much as the indexes. So-called underperformance during shorter-term market rallies is the price paid for the protection provided, and smart investors don’t mind paying for life insurance and failing to die.
  • The only common feature of all hedge funds is a specific pooled-investment legal format. Hedge funds pursue different strategies, in disparate asset classes, with divergent investment goals – at least a dozen major hedge-fund categories, and hundreds of permutations.
  • Articles focusing on a combined-performance statistic for all hedge funds are the equivalent of a sports story that averages the scores of teams.
  • The difference in performance between the top and bottom 10% of hedge funds in any given strategy is enormous, much greater than it is in the stock-picking world.
  • An awful lot of hedge-fund managers charge Tiffany prices for Kmart merchandise. The common 2% annual management fee and over 20% of any profits earned model is tough to justify in today’s return environment – most managers don’t deserve what the stars earn.
  • The $2 trillion in hedge funds tells us that many savvy investors don’t want to make all-in, one-way bets on the stock market. They want downside protection and broader opportunities for profit.

Read the full article at http://online.wsj.com/article_email/SB10001424127887324412604578515830008445290-lMyQjAxMTAzMDEwNzExNDcyWj.html?mod=wsj_valettop_email.

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U.S. Stocks Fluctuate as Investors Weigh Economic Data – Bloomberg 05-31-13

Salient to Investors:

Joseph Tanious at JPMorgan Funds said everyone is trying to figure the Fed – strong data reinforces the Fed message of the past few weeks and justifies the tapering of QE, while weak data makes people think the Fed is going continue QE a bit longer, with the end result of increased volatility.

Richard Sichel at Philadelphia Trust says it has been a wonderful month, with ‘Sell in May and go away’ blown apart.

Read the full article at http://www.bloomberg.com/news/2013-05-31/u-s-stock-index-futures-fall-as-investors-await-data.html

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An Unintended Consequence of Obama’s Presidency – Bloomberg 05-30-13

Salient to Investors:

Stephen L. Carter at Yale writes:

  • The law of unintended consequences rests on a deceptively simple insight: We cannot predict the future. There are always externalities, and it’s impossible to identify all of them in advance.
  • Eli Whitney patented the cotton gin in 1794 which led to a sharp increase in the number of slaves, that historians would cite his invention as one of the precipitating causes of the Civil War.
  • Many supporters of the Affordable Care Act insist it is not having a depressing effect on hiring, and many supporters of our drone-attack strategy against terror leaders reject the accusation that we might be creating more terrorists.
  • Whatever policy we support will have bad effects as well as good, and that we take the positions that we do because we believe that the good effects greatly outweigh the bad.
  • Adam Smith’s “invisible hand” is the unintended consequence of countless small decisions by people seeking to maximize their individual welfare.
  • Albert O. Hirschman warned of the pernicious consequences that arise when governments are certain that they are right, and social scientists have an obligation to consider the likely real-world effects of their ideas.
  • Policy makers and pundits should stop pretending that any idea, no matter how well-intentioned, will have only beneficial effects. The more complex the policy in question, the more likely are unintended consequences.

Read the full article at http://www.bloomberg.com/news/2013-05-30/an-unintended-consequence-of-obama-s-presidency.html

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How Halsey Minor Blew Tech Fortune on Way to Bankruptcy – Bloomberg 05-31-13

Salient to Investors:

Halsey Minor sold  CNET Networks for $1.8 billion in 2008 and 5 years later has filed for personal bankruptcy thanks to bad bets on real estate, horse farms, start-up investing, and other ventures that took him out of his technology comfort zone.

Read the full article at http://www.bloomberg.com/news/2013-05-30/cnet-founder-minor-files-for-bankruptcy-after-selling-art.html

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Economy in U.S. Grew at 2.4% Rate, Less Than First Estimated – Bloomberg 05-30-13

Salient to Investors:

The boost to household wealth from rising home values and stock prices is allowing Americans to weather higher payroll taxes and sustain purchases, the biggest part of the economy.

Millan Mulraine at TD Securities USA said the economic outlook is still favorable with fairly robust growth driven by consumer spending, and expects an acceleration in half2.

The median economist expects growth to cool in Q2 to a 1.6 percent annualized rate, and grow at an average pace of 2.4 percent in half2.

Brian Jones at Societe Generale said the economy is on a better footing with more final demand and a variety of drivers for growth. Jones said the economy may cool this quarter, but not by much.

Consumer confidence climbed in May to the highest level in over 5 years, and the S&P/Case-Shiller index of home values in 20 cities advanced in the year to March by the most in 7 months.

Read the full article at http://www.bloomberg.com/news/2013-05-30/economy-in-u-s-grew-at-2-4-rate-less-than-first-estimated.html

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Treasuries Loss Is Biggest in 3 Years as Fed Considers Tapering – Bloomberg 05-31-13

Salient to Investors:

Larry Milstein at R.W. Pressprich said the market will overreact to the economic data over the next couple of months.

The median economist expects the 10-year yield to end the year at 2.20 percent.

David Coard at Williams Capital said we are in a bear market for Treasuries, but that does not mean we will see rates rise sharply. Coard said people are skeptical about the economy, which is strong enough that over the balance of this year we will see rates rising.

The Thomson Reuters/University of Michigan final index of sentiment increased to 84.5 in May, the strongest since July 2007.

Thomas Tucci at CIBC World Markets said everyone realizes some risk has been put back into the bond market.

Justin Lederer at Cantor Fitzgerald says we have found the right attractive level, at least for the time being.

Read the full article at http://www.bloomberg.com/news/2013-06-01/treasuries-loss-is-biggest-in-3-years-as-fed-considers-tapering.html

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Armour Biggest REIT Share Loser as Fed Weighs Exit – Bloomberg 05-31-13

Salient to Investors:

Jason Stewart, an analyst at Compass Point Research & Trading Interest rates moving higher and Fed talk about tapering QE much earlier than the market thought have sent mortgage REITs lower.

Michael Widner at Keefe, Bruyette & Woods said the bond markets have over-reacted to Fed comments, and mortgage REITs have over-reacted to the bond market. Widner recommends buying while prices are low, but says the whole episode highlights risks and difficulties in predicting impacts of QE.

Merrill Ross at Wunderlich Securities said the exiting its eight-month domination in the agency mortgage market is not quite as straightforward for the Fed as entering the fray back in September 2012.

Christopher Donat at Sandler O’Neill expects reductions in dividends rather than increases in the next few quarters, and warned of risks of over-reactions and real risks to the stocks because so much of the ownership is made up of retail investors.

Read the full article at http://www.bloomberg.com/news/2013-05-31/armour-biggest-reit-share-loser-as-fed-weighs-exit.html

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Salient to Investors:

 

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Asia Attracts Wealth as China’s Richest to Eclipse Japan – BLoomberg 05-30-13

Salient to Investors:

Boston Consulting Group said:

  • Asia-Pacific centers such as Singapore and Hong Kong are expected to receive most of the newly created wealth in the region that finds its way offshore.
  • Hong Kong has the greatest concentration of billionaires followed by Switzerland.
  • Asian wealth outside Japan will surpass North America by 2017.
  • China will pass Japan to become the world’s second-wealthiest nation by 2017 and will have more millionaire households than Japan by the end of December.
  • The number of millionaire households in the US in 2012 was 4 times as many as China or Japan.
  • Private banks must build a presence in Asia as the region’s centers increase their share of offshore wealth to 18 percent by 2017 from 15 percent in 2012.
  • Switzerland remains the largest center for offshore private wealth, while the proportion of assets held in Zurich, Geneva and London will decline.
  • The offshore industry is still viable as wealthy people look to spread their assets across different booking centers and seek domiciles with discretion and economic stability.
  • Emerging markets will surge on new wealth creation over the next 5 years, with India set to more than double private wealth by 2017.
  • North America and Europe will depend on returns from existing assets for more than half of their wealth growth.

Read the full article at http://www.bloomberg.com/news/2013-05-30/asian-hubs-attract-wealth-as-china-millionaires-to-eclipse-japan.html

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David Stockman: We’re Blind to the Debt Bubble – PBS Newshour 05-30-13

Salient to Investors:

David Stockman said:

  • The baby boom generation has unfairly benefited from bubble-finance, a 30-year explosion of debt which created temporary but unsustainable economic prosperity, and a financialization of the system through lower and lower interest rates that has massively rewarded speculation but not real investments. $60 trillion of net worth in the household sector of which $45 trillion belongs to the top 5 percent.
  • We need take back at least some small fraction of the great windfall for the upper 1 to 5 percent and pay down the government debt else the next generation is going to be buried paying taxes.
  • The stock market index is up 136 percent from the bottom, but we have recovered only 1 million of the 6 million middle class jobs lost. Stock prices are not sustainable because our economy really is failing – the number of jobs today is the same as it was in 2005.
  • The stock market is almost identical to where it was in October 2007 and in March 2000 and we’ve had two massive crashes in between. The middle class has bought stocks been  sheared like sheep twice.
  • The stock market will have a crisis of confidence but no one can predict the bottom a la the dot-com crash and the Lehman crash – but it will fall thousands of points because everyone will panic. No one is buying stocks because they believe there’s a huge sunny future for the US economy but because they think the Fed can keep the thing pumped up, the bubble expanding.
  • Zero percent interest rates is crazy because it doesn’t help Main Street, which has too much debt already, but is simply a bonanza for speculators who can borrow the overnight money.
  • Every central bank is doing the same thing. The rate of expansion of balance sheets is unprecedented and off the charts. Japan has been a massive bubble for 20 years. The Bank of England is a disgrace.
  • Half the real estate value in the world in 1989 was in Japan and then it crashed and has been declining ever since. The Japanese stock market was half the world market and yet the Japanese economy has gone nowhere since the 1990s and they’ve tried to work their way out of it by printing even more money and it hasn’t worked. Now, I’m saying this is what all the central banks are doing. There is no honest interest rate in the world today.
  • This isn’t an excess of real savings. There is an excess of artificial credit that’s being fueled by all the central banks.
  • Let’s let the free market set interest rates where supply of savings is matched with demand for real borrowing for capital projects. If you let interest rates be set by the free market, they would rise dramatically. The back of the speculative bubble would be broken and we could slowly heal the financial system. But this will never happen because there’s trillions of asset values dependent on the Fed continuing to suppress, repress interest rates and inject $85 billion a month of liquidity into the market.
  • All of the central banks are in a race to the bottom by expanding their balance sheets at rates never been seen before. This money is not leaving the financial markets. And much of it comes back as excess reserves in the banking system which gets deposited at the Fed. It doesn’t go into credit on Main Street because Main Street is already saturated with debt. Suppressed interest rates makes gambling highly rewarding – buy anything with a yield and fund it 98 percent with zero cost money. The 1 percent are laughing all the way to the bank.
  • The Fed can’t get out of the corner they painted themselves into because we are so addicted to bubble finance. Bernanke has no clue how he got where he is or how he’s going to get out of the massive balance sheet expansion. The Fed is running a con game.
  • The problem is not goods and services inflation or labor inflation but speculation. Real inflation is higher than CPI.
  • Bernanke has already made two bubbles, didn’t see subprime, didn’t see the housing bubble, didn’t see the economy crater under the credit bubble in ’07 and ’08, and has been wrong ever since he’s been in public office.
  • In 1999, many said maybe there’s a little bit of froth out there. Many were calling it the “Goldilocks Economy” in late 2007/2008. The Chairman of the Council of Economic Advisors said there was no recession in sight anywhere in June.

 

Read the full article at http://www.pbs.org/newshour/businessdesk/2013/05/david-stockman-were-blind-to-t.html

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NYC Pension Chief Seeks $500,000 Managers Not Wall Street – Bloomberg 05-30-13

Salient to Investors:

New York City’s retirement system is the only one of the 11 biggest US public-worker pensions that refuses to manage any assets internally.

The typical fees for hedge funds and private-equity and real-estate firms is 2 percent of assets plus 20 percent of profits.

Last year, three city pension funds paid more than $1.2 million in fees on a $160 million investment in a real-estate fund – the fund has returned 0.3 percent since 2004.

Miller Samuel and Douglas Elliman Real Estate said the median sales price of a two-bedroom condominium in Manhattan was $1.6 million in Q1, 2013

Read the full article at http://www.bloomberg.com/news/2013-05-31/nyc-pension-chief-seeks-500-000-managers-not-wall-street.html

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