The Best and the Brightest

Career Risk Panic: Only 11% Of Hedge Funds Are Outperforming The S&P In 2012

Tyler Durden, Zero Hedge

08/20/2012 19:10

The S&P500 may be soaring to new 2012 highs, and has its all time highs within short squeeze distance, yet paradoxically this is arguably the worst possible news to the cadre of US hedge fund managers used to beating the market year after year, thus justifying their (increasingly more unsustainable) 2 and 20 fees. The reason: according to just a released report quantifying hedge fund performance so far in 2012, with an average return of 4.6% as of August 3 compared to a 12% return for the S&P, a pathetic 11% of all hedge funds are beating S&P year to date. This is the worst yearly aggregate S&P 500 underperformance by the hedge fund industry in history, and also explains why the smooth sailing in the S&P500 belies the fact that nearly every single hedge fund manager (and at least 89% of all) is currently panicking like never before knowing very well there are only 4 more months left to beat the S&P or face terminal redemption requests. And with $1.2 trillion in gross equity positions, the day of redemption reckoning at the end of the year (and just after September 30 for that matter as well) could be the most painful yet.

More Evidence Wall Street is Overpaid

Matt Taibbi, Rolling Stone

August 21, 9:11 AM ET

(O)ne of the most frequently-overlooked problems of the financialization age is that a lot of our brilliant financial engineers are actually pretty damned average, when it comes to playing the market.

There’s a great little piece at Zero Hedge about how hedge funds are having a terrible year (for the second straight year), with only 11% of all funds outperforming the Standard and Poor’s 500, the basic stock index.

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Translating that into English, all those super-rich people who turned to hedge funds with their millions in the hopes that bunches of Whiz-Kids from Wharton and Harvard and Yale would find unseen and wildly creative investment ideas to fatten their fortunes — all those rich clients are actually finding out now that those same Whiz Kids are buying Apple just like the rest of us. Hey, it has to be a good stock, right? Everyone has an iPhone now.

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As is apparently also the case with Mitt Romney’s PE business, which analysts have found often don’t do much better than average if at all, the data shows more and more that we’d all be better off, and there’d be a lot less mischief, if the world’s biggest and more powerful investment specialists just dumped money into humdrum baskets of stocks instead of racking their enormous brains to come up with exotic new trades.

Someday we’ll get back to the time when the really smart guys from the best schools went to work for companies that built actual products, engineered more efficient cars, cured diseases, etc. Because it seems like our best minds kind of suck at investing.

Uncle Sam Needs YOU for a Bailout: 6 Reasons Another Big Banking Crisis Is Coming Our Way

By Alexander Arapoglou and Jerri-Lynn Scofield, Alternet

August 17, 2012

(R)egulators decided that sophisticated investors, including the wealthy, pension funds and charities, had enough financial savvy to be allowed to invest in shadow banks that were either lightly regulated, or not at all. Such alternative investment vehicles, including hedge funds and private equity funds, were exempt from investment restrictions.

In the last two decades, there’s been an explosive growth in shadow banks. The size of this unregulated system has increased fivefold and today is larger than the regulated financial system.

The rationale? Sophisticated investors, it’s claimed, can look after themselves, and therefore the largely unregulated funds that cater to them don’t pose any risks to the rest of us. But that’s not proven to be the case.

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(A) decade before this bailout, U.S. financial regulators were involved in a rescue of a shadow bank, which helped set the stage for TARP.  In 1998, the Long-Term Capital Management (LTCM) hedge fund got into trouble by placing heavily-leveraged derivatives bets during the Asian financial crisis. Hedge funds are allowed to operate with scant regulatory supervision on the rationale that they cater only to sophisticated investors who could bear the risk.

The Federal Reserve changed its mind when it realized that LTCM’s failure was a threat to the global economy. So the Fed corralled major banks in a room, and told them to fix the problem. They dismembered LTCM and took its underperforming assets onto their books.

The Fed’s role in this rescue sent the wrong message: that the government would be there to fix problems, and that banks and shadow banks alike didn’t have to work too hard to manage risk and to protect themselves from contagion.

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Banks need to be seized, or at minimum assessed by a neutral observer, and their balance sheets cleaned up. Investors, too, must pay a price for making foolish investment choices. Typically, existing shareholders are wiped out, while bondholders see their promises of guaranteed debt payments converted to more speculative shares of stock.

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(T)he lack of a streamlined regulatory system means banks play regulatory arbitrage. Recently we saw this dynamic unfold-unsuccessfully in this case- as Standard Chartered Bank used its press cronies to pressure Benjamin Lawsky, New York’s Superintendent of Financial Services, to go easy on the bank for laundering money for Iranian clients and cooperate with other regulators – the Fed, Justice and Treasury- that favored a softer stance. Lawsky threatened to cancel the bank’s license to operate in New York-a death sentence for any international bank. When he didn’t back down, the bank agreed to a $340 million settlement. Lawsky’s firm stance improves the prospects for the pending federal probes.

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And so we come back to where we started-the decision not to go after Goldman Sachs. Normally, the Justice Department doesn’t  comment on its pending investigations. But for Goldman, the rules are different. Justice issued an unusual statement saying the firm wouldn’t be criminally charged, as prosecutors didn’t believe they could meet the burden of proof necessary to win a trial. Earlier last week, Goldman disclosed that the SEC wouldn’t be pursuing criminal charges against the firm, despite having issued Goldman a “Wells notice” of its investigation. Dropping an investigation after issuing such a notice is not altogether unprecedented– but is also rare.

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The current failure to prosecute means that banks will continue to pursue risky policies. Bankers continue to get paid based on results, and there’s so much to gain from a successful risky bet, and so little to lose from a bet gone bad, particularly if the taxpayer is there to pick up the tab.

In America, if you misuse food stamps, and you get caught, there’s a good chance you’ll lose your benefits, and you might even go to jail.  If you rip off the Medicare system, commit tax fraud or perpetrate identity theft, federal prosecutors will throw the book at you. But if you’re part of a multi-billion dollar enterprise that misleads investors and lies to Congress, you’re like the trophy fish that’s caught and released.  You’re off the hook.

(h/t Naked Capitalism)

I see in fight club the strongest and smartest men who’ve ever lived. I see all this potential, and I see squandering. God damn it, an entire generation pumping gas, waiting tables; slaves with white collars. Advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don’t need. We’re the middle children of history, man. No purpose or place. We have no Great War. No Great Depression. Our Great War’s a spiritual war… our Great Depression is our lives. We’ve all been raised on television to believe that one day we’d all be millionaires, and movie gods, and rock stars. But we won’t. And we’re slowly learning that fact. And we’re very, very pissed off.