July 1, 2002

Fractured Hedge Fund Fairy Tales

The Fox Finds Sour Grapes and Other Fractured Hedg

CHICAGO (HedgeWorld.com)--The fox has been scouting the vineyards otherwise known as the popular press, and all she has to report is, "Boy, are these grapes sour!"

First it was Forbes, which I quit reading altogether. After all, they don't even have good pictures. Now, it's Barron's, which has gone so far over the edge on hedge funds that I'm embarrassed to be seen reading it. I suppose I could always say, "I only read it for the cartoons." This should work at least until The New Yorker gets over its post-9/11 slump and the National Review gets better personals ads again.

The disillusionment started with Alan Abelson's Dec. 17 column, in which he compared an unnamed group of hedge fund managers sitting around "shooting the bull" to the infamous tape of Osama bin Laden and "his buddies chortling over the destruction of the World Trade Center." As a many-time winner of the Ms. Heart of Darkness championship, my sense of humor is as black as anyone's, but this comparison really was in the worst possible taste. As a fellow journalist, I was prepared to make excuses and forgive Abelson his temporary lapse in dignity and humor. After all, I figure most of us have watched way too much television since Sept. 11, and that's a good enough reason for clouded judgment.

"Everyman" and His Hedge Fund

And then the Jan. 7 issue of Barron's landed on my porch, and the cover story hit me right between the eyes. It seems that hedge funds not only fly high, are secretive and risky, but now they're latching on to the mutual fund industry like so many parasites. The heart of the problem seems to be that the hedge fund industry is infecting the mutual fund industry and they're developing new products. How dare they? And in a free market yet!

For the last couple of weeks, I have been carrying around and rereading Erin E. Arvedlund's Jan. 7 article, "Hedging their Bets: Fund Groups Offer Vehicles Once Meant Only For the Rich; Are There Dangers?" I guess I'm waiting for it to sing out a "Te Deum" and provide an accompanying revelation that will show me what's so wrong with these new vehicles. So far, I've had no epiphanies.

"Once a secretive investment playground open only to the super-rich, hedge funds can now be had by the semi-affluent for minimums as low as $25,000," said the article. The author seems to be laboring under the illusion that if the unholy alliance of mutual fund companies and hedge fund managers continues, you may soon "walk past your corner discount brokerage office and see the signs in the window offering hedge funds for Everyman."

Arvedlund seems to have morality plays mixed up with fairytales, or even outright untruths. "Everyman" can't have a hedge fund--even if he does have a spare $25,000 begging to be placed in one. As the article itself states, while some of the new vehicles may have lower minimums--$25,000 to $50,000--a minimum net worth of $1 million to $1.5 million is still required. Doesn't sound like "Everyman" to me, but I haven't seen my neighbor's checkbook lately, so maybe...

The article continues, "...nearly every large mutual-fund family is offering, or planning to introduce, hedge funds to institutional clients and wealthy individuals. The roster includes big names, such as Alliance, AIM and Putnam."

And this is a problem because? The article says "conflict of interest" is the issue. The voices in my head keep saying "Disclosure, disclosure, disclosure," and "If you don't like it, don't buy it." After all, if people don't like and buy new products, they go away, but they deserve the choice. It's that free market thing again. After all, more choices mean more possibilities for diversification. And if you're not a full believer in diversification yet, go talk to a few "Enroned" investors.

The article also says, "Finally, hedge-fund fraud is a looming threat to carefully tended mutual-fund brands. 'What's my definition of a hedge fund? A day trader with a private placement memorandum,' says Edward 'Ted' Siedle, president of Benchmark Advisory Services. Says Siedle, who monitors the management of pension-fund assets: "They're completely unregulated, and nobody really knows how many there are out there. It's like asking how many drug dealers there are.'"

Once again, I say go talk to those who were "Enroned"--the Jan. 27 New York Times listed 31 pension funds that lost assets in that corporate cataclysm. There's plenty of fraud to go around throughout the investing world, and I've never once had a hedge fund manager ask me to meet him outside a methadone clinic.

Like any other investment, the responsibility belongs to the investor. I am not the Oracle of Sympathy for investors who feel they've been burned. I'm not even sure I have the protein in my genetic structure that allows me to generate sympathy for those who don't do their due diligence. For any investor who chases hot numbers, here is my unsolicited and unprofessional investment advice: "Buy plenty of aloe vera, because I really don't want to hear you cry when you get burned." Protecting yourself is no one's responsibility but your own.

The Mutual Fund & The Hedge Fund Dragon

If you didn't already guess, I really didn't like this story very much, so I'd like to propose my own variation on this fractured fairytale.

Once upon a time not all that long ago, in this very land, a tiny seed that grew up to be the mutual fund industry was planted. People invested in mutual funds and the mutual funds grew and yielded high returns. Life was good. Then one day a big nasty dragon named Hedge Fund came to town. No one understood the dragon, and they were convinced he would burn them. The dragon hung around on the outskirts of the village for a few years, and even made friends with some of the wealthier folk who were accustomed to taking a few calculated risks here and there. Eventually those who tended the mutual funds noticed that the dragon wasn't so bad, and he might even provide some protection in the bad times that had come to the land of the mutual funds. And so a deal was struck between the mutual fund tenders and the hedge fund dragon, and life was better than good.

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