Thursday’s indictment of SAC Capital Advisors on insider-trading charges may be a tipping point, signaling the beginning of the end of an era of hedge fund terrorism. It’s about time that this industry is held accountable for the coldly-calculated damage it’s done.
Financial scamming of all varieties seriously undermines the foundation of American society. When individuals are robbed of their hard-earned life savings, families are demoralized, devastated and may be unable to recover for decades. Years of prudent financial planning can be destroyed overnight.
There have always been scammers in the money management industry but hedge funds, with outrageous fees and compensation structures, are money management on steroids. The abuses related to the staid world of traditional investing, a percent or two here and there, are chump-change compared to brazen hedge fund gouging.
While mutual fund managers sip tea, hedgies pound flaming tequila shots.
There is so much money to be made, everyone wants to get in on the action—consultants, politicians, placement agents, and former hedge fund clients, such as fiduciaries who leave pensions, endowments and foundations to join the industry.
If you hire a hedge fund for the pension you oversee, you’re virtually guaranteed a job at the fund upon departure.
The justification for the exponentially greater fees- market-beating returns- rarely materializes and never endures. Far more money has been lost in hedge funds by investors chasing returns than has ever been made.
Years ago I received a call from a reporter who was looking to do the next story about John Paulson, the manager who’d made billions during the market meltdown of 2008. Write a story about how he’s going to lose billions more of investor monies, was my suggestion.
While investing in hedge funds is supposedly limited to sophisticated investors who are capable of understanding the risks and bearing the losses, private and public pensions, endowments and foundations have loaded up on this toxic garbage. The decision-makers at these institutions aren’t high net worth trust funders and, even if they were, they’re not gambling with their own money. Lug nuts managing these portfolios rarely have a clue about the operational risks related to hedge funds and have generally agreed to forego transparency regarding hedge fund portfolio holdings and strategies.
Can agreeing to be kept in the dark about your money ever be considered sophisticated?
I’m often asked, “Aren’t there any good hedge funds?” The beginning of an answer to that question is: Are there any fully transparent hedge funds? Opaque investments can never be good, in my book.
I consider hedge funds terrorists because they not merely gouge investors; the industry has very deliberately behind-the-scenes schemed to manipulate public perception of their product. The industry thrives on lack of transparency and works hard to keep investors in the dark regarding investment performance results, as it propagates the myth of hedge fund outperformance.
Most notably, from sea-to-shining-sea the freedom of information statutes of the states have been changed to permit hedge funds to conceal their lackluster performances and the high fees they charge public pensions. When you consider the herculean effort required to stymie access to public pension hedge fund data nationally, it is apparent that keeping this infomation secret is paramount to the industry. Proprietary information and trade secrets are the exemptions to the FOIA laws that the industry has successfully argued across the land.
Trade secrets detailed in hedge fund offering documents? You’ve got to be kidding! I've reviewed hundreds of these documents and, trust me, they recite little more than boilerplate —aside from references to myriad fees and mind-blowing conflict of interest disclosure that would cause any rational fiduciary to run for the hills. With some states proposing to invest up to 40% of public pension assets in alternatives, hedge fund secrecy could result in a state-sized financial collapse.
Flush with cash for political donations, the industry has plenty of friends in Washington. Working with the financial press and so-called think tanks, it has created its own seemingly prestigious awards for decision-makers who promote the hedge fund agenda. Even the SEC has been persuaded to weaken the laws on hedge funds marketing.
Given the financial ruin this industry has caused, its time to thwart this terrorist threat.
