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O’the Slings And Arrows Of Outrageous Fortunes

March 31, 2013

Essay. The hedge fund industry is bushwhacked again and will soon be driven to the funny pages by its own excess. Not only are they in the Courts – orange is in and the blue suits are out (on bail) – (Reuters, March 29, 2013, More trouble for Cohen’s SAC Capital as Steinberg indicted in NY) but it’s now deemed newsworthy that they should somehow manage to get a market return, even if only for a short time (Reuters, March 29, 2013, Loeb’s Third Point outperforms hedge fund rivals again). Do these guys oil the system, or are they just sand in the gears, and how do we protect our investments and profits from such jocularity? For some helpful hints, please see our Posts on (B)(N) HLF Herbalife Limited, January 2013, or (B)(N) CNR Canadian National Railway Company, December 2012 and (B)(N) YHOO Yahoo! Incorporated, November 2012, or any of the Hedge Funds Bushwhacked By Volatility Posts.

The Securities and Exchange Commission (SEC) describes Hedge Funds in the following way:

Like mutual funds, hedge funds pool investors’ money and invest the money in an effort to make a positive return. Hedge funds typically have more flexible investment strategies than mutual funds. Many hedge funds seek to profit in all kinds of markets by using leverage (in other words, borrowing to increase investment exposure as well as risk), short-selling and other speculative investment practices that are not often used by mutual funds.

Unlike mutual funds, hedge funds are not subject to some of the regulations that are designed to protect investors. Depending on the amount of assets in the hedge funds advised by a manager, some hedge fund managers may not be required to register or to file public reports with the SEC. Hedge funds, however, are subject to the same prohibitions against fraud as are other market participants, and their managers owe a fiduciary duty to the funds that they manage.

Hedge fund investors do not receive all of the federal and state law protections that commonly apply to most mutual funds. For example, hedge funds are not required to provide the same level of disclosure as you would receive from mutual funds. Without the disclosure that the securities laws require for most mutual funds, it can be more difficult to fully evaluate the terms of an investment in a hedge fund. It may also be difficult to verify representations you receive from a hedge fund.

Indeed, hedge funds are known for their secrecy and their managers tend to seek the seclusion and privacy of their mansions, art, horses, automobiles, airplanes, boats, and good causes in charitable and political giving with the new money that they didn’t really earn by themselves, beyond the pauper’s wage of $10,000 an hour (union scale, journeyman experience, plus expenses) which is barely $20 million a year in most cases because of the short work week that is apparent in the tardiness of their disclosure. But time is money and we shouldn’t expect to see them with less than a few hundred million to invest (although Title IV of the Dodd-Frank Act has eliminated the private adviser exemption and tightened up on the reporting, risk management, and disclosure requirements of hedge funds).

Nonetheless, they left a lot of money on the table in the last quarter because they didn’t know it was there, and to help them in the next quarter, we’ve put together the following table to make things clearer in case things don’t work out as planned because of some surprise in earnings or economics:

Exhibit 1 : The Slings & Arrows of Outrageous Fortunes – March 2013

Slings & Arrows

(Please Click on the Chart to make it larger if required.)

Mr. Loeb’s Third Point Offshore Fund and the Third Point Ultra Fund (which is the leveraged version of the Offshore Fund) outperformed their rivals and gained +9.2% and +13.3%, respectively, in the first quarter with about 30% of the gains occurring as recently as March (ibid, Reuters); his friendly rival, Mr. David Einhorn (heavily weighted in Apple Corporation stock) obtained +6.1%; the Vanguard 500 Index Fund obtained +10.57%; and the Cooperman’s Omega Advisors and Cobalt Offshore Fund are each up +6.55% and +3.63% (through February).

In contrast, Mr. John Paulson’s Advantage Fund lost minus (2.63%) through February, and the Hedge Fund Research data show that most funds, of thousands, were nearly flat for the month with only a +0.69% percent gain, and +3.11% percent gain for the year through the end of February.

In aggregate, then, it seems like a very unhappy performance in which negligible gains – barely above inflation – have been made on the trillions of dollars entrusted to these folks, and they cannot make any prediction of what will happen if the markets fail to deliver double-digit gains in every quarter for the rest of the year. Nor any commitment to keep what they have.

With reference to Exhibit 1, the market capitalization of the four major North American markets, the Dow, the Nasdaq 100, the S&P TSX and the S&P 500 NYSE, representing over 900 companies and more than 80% of all public equities, gained $1.8 trillion or +10% in the current period, and it would seem that the hedge funds got little or none of it abroad and offshore, if that’s the case.

The RiskWerk Company uses a different investment model that we usually describe as The Perpetual Bond™ in which the investor capital is sacrosanct:

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

There are no fees and no loads on capital, and we are paid for performance, not just for performing. The Quintessential Perpetual Bond™, if scaled and executed on the entire market as illustrated, returned $1.4 trillion for a gain of +14%, and, similarly, the (B)(N) Perpetual Bond™ also returned $1.4 trillion for a gain of +12% in the last three months since early January, and we know exactly how that was done – chance and risk has nothing to do with it – and the returns will be no less than that for the rest of the year, regardless of what the markets will do. And, of course, where do those gains come from? Well, from other investors in the same markets who are buying what we’re selling and selling what we’re buying.

For more details on the actual portfolios, please our previous Posts, The Dow Transports, March 2013, or The Wall Street Put, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, for real investments in real companies in real time.

These data may also be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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