Hedge Funds

This presentation from the Managed Funds Association offers insights into the state of hedge funds:

Evolution of Hedge Funds ...

Allan Sloan of Newsweek recently wrote this article on hedge funds. An excerpt:

Susan Wyderko, head of the Securities and Exchange Commission's office of investor education, warns investors to beware. "Although ...

From Reuters:

WASHINGTON, Aug. 31 (Reuters) - The Securities and Exchange Commission filed civil fraud charges Wednesday against two executives of KL Group, a hedge fund in Palm Beach, Fla. The S.E.C. charged that Won Sok Lee, Yung Bae Kim and another unidentified defendant "defrauded investors through misrepresentations and omissions concerning the profitability and security of their investments in the hedge funds." The whereabouts of Mr. Kim and Mr. Lee are unknown and they do not have any known legal counsel, according to the S.E.C. senior trial counsel, Scott A. Masel. In March, the hedge fund was shut down and its assets frozen by a Florida judge after the S.E.C. filed a civil action to halt what it described as an $81 million fraud. The March complaint charged that the KL Group, a related trading entity and the KL principals, Won Sok Lee, John Kim and Yung Bae Kim, fraudulently raised over $81 million, attracting investors by using fake account statements showing that the hedge funds were profitable."
Reuters

We know what you are thinking, "so what!"

But there are some good lessons here perhaps not so obvious:

• It is a zero sum game. So inept investors not doing their homework and throwing money at hedge fund scams, provide losses to the winners out there armed with proper strategy.
• Palm Beach is a land of wealth. Here we have people awash in cash and hopefully knowledge who still make mistakes. Big mistakes. Money by itself will never insure success. If you are foolish and greedy in the markets, the markets will punish you.
• Fly by night hedge fund managers promising untold riches with no proof should cause one to pause.

More on hedge fund scams...people never change!

Dallas Mavericks owner Mark Cuban wants to start an investment fund that makes money by gambling - maybe even betting on sports. The idea would be to "prove that traditional gambling, via a fund, is less of a gamble than investing in the stock market," Cuban said Tuesday by ...

We all know crude oil has had a huge run this year. It has come off its all-time high, but still continues to be much higher than the beginning of the year. Taking that into account, consider Barton Biggs's words from this past summer:

Biggs said he thought the price of oil should ...

The TurtleTrader web site mentions numerous traders, most of whom trade a trend following system. However, Trend Following to make money for yourself is different from Trend Following to make money off fees from clients. This is a critical to understand. If the only thing you do is to Trend Follow as originally intended — which was to make the most money possible -- then you align yourself with the Turtles and what they learned.

The Turtles were turned loose and told to make the most money possible. They had no restrictions. However, later on, when many of them went out to manage money for clients they changed some aspects of how they traded. They still continued to make a lot of money, but they also began listening to their clients. Why? Because managing money for others often puts you at their whims, and clients are always risk averse. By requesting less risky actions of the manager, the client puts a straight jacket on the manager from properly implementing the trading system.

Why do some managers handle client money if they know they will not be able to implement their system properly? Greed. Management fees from clients can be huge. If you manage $100 million you can get a 2-6% management fee even if there is no positive performance. That's $2-6 million profit for being no more than a caretaker of assets. If you go this direction you no longer are focused on Trend Following, you’re focused on the fee.

Issues to keep in mind:

1. Clients seldom understand. Managing money for clients is hard. Clients usually don't understand Trend Following and will often panic and pull out just before a big move that could make them a lot of money.
2. Clients are impatient. They often put money with a manager at the wrong time and just as often take it away at the wrong time.
3. Clients may request an initial system adjustment. They want Trend Following changed in order for them to invest their money in the first place. The manager is then faced with a difficult decision: take the client money and make money through management fees (which can be very lucrative) or trade as originally designed. Obviously, trading a trend following system as originally designed is the optimal path in the long run.
4. More Client money doesn’t mean more success. Trying to trade millions upon millions of dollars for clients is hard to do. Trend Followers always had their best returns managing less money.

You can see why looking at publicly tracked money managers for clues to Trend Following reveals only half the story. If you let those statistics influence your assessment of Trend Following, you make a big mistake. The next time a money manager retires, look closely to see why. Usually difficult clients were the main reason.

What does all this mean for the individual trader?

Opportunity. The opportunity to make big money (30-100%), while trading as a Trend Follower, has never been greater as long as you:

1. Trade a trend following system.
2. Trade it the right way as intended.
3. If you ever get to the point where you want to trade for others -- never ever listen to their advice on how to trade the system.

What are Managed Futures? Some definitions:

Public funds, private pools, managed accounts, and other investment entities which invest on a long and/or short basis almost exclusively in exchange traded commodity derivatives and/or financial derivatives ...