4 replies to this topic

[toni]

Smart Money. "Accredited investors". What the professionals in Wall Street seem to think are the smart money. Those buying hedge funds. Maybe only a coincidence, but what the professionals in Wall Street are selling. And those Wall Streeters live all over the country, not just in NY. This "smart money" is paying 10 times the expense racio as index funds from Vanguard as well as other firms. 2% management fees. AND 20% of all profits, as opposed to an ER of 0.20%. Then the hustlers on Wall Street running these hedge funds hedge away 99% of the risk. But there is that 1% still there, leaving a 1% profit on invested capital. However they go on 10 or more times margin. And realize 10 to 20% profits for the year. The manager takes his 2 & 20 and gives the other 78% to his investors. That 1% risk is not hit for some time. That time seems to be now. Until their rendezvous with the Black Swan comes along representing that 1% unhedged risk. Then the hedge fund blows up. The "accreditated investors" lose all or most of their "investment". The hedge fund general partner then closes the hedge fund, takes his past fees (his 2 & 20) to the bank. And rounds up more "smart money" for another hedge fund. These " accredited investors" are the "smart money"????? Dumb Money. This investor keeps putting his money year after year in his 401k plan from work or his business retirement plan. Investing the money year after year in index funds. Controlling risk through asset allocation at the portfolio level. Starting say in 1975 and continuing this way until he retires 32 years later in 2007. He has been contributing $5000 or $6000 per year amd getting his employer match each year. Never timing the market, never taking any money out, and reinvesting all of his distributions. Doing nothing after making his yearly contributions. Riding out all bear markets and all bull markets from 1975 until 2007. Rebalancing January 2nd each year back to his desired asset allocation. If he retired on August 31, 2007 he retired with over $1,000,000. One million dollars. A true bagholder's bagholder. And Wall Street calls him "dumb money". This example was presented at a recent meeting of the Vanguard Diehards. I don't think he is the dumb money. I think he is the smart money. The "accredited investor" is the "dumb money". toni b

[qqqqtrdr]

Those hedge fund mutual funds are starting to lose money. Yes it is the matter of picking the right hedge fund with the right advisor. But I think it is very difficult to make money long term with Hedge funds..... Barry

[arbman]

The performance of any fund goes down with its size. When there is a mutual fund like hedge fund, you can be sure that it will not work. The smaller pools with a smart management can outperform the market for years though. The market timing is about finding the proper leverage in the direction of the primary trend or playing with the odds, so there is a lot of accounting involved, not only the trend determination. Any strategy will have its down days, I am yet to hear about a model that predicts the market over 90% accuracy. The other factor in the accounting is about finding the market liquidity to support the strategy, you can not use them all the time. Many of the leveraged strategies I employ would break over $70-80M limit --I am far away from that kind of capital though, so you would need something like a 50bps rate cut kind of news to have them work all the time! What the accredited investors will do is they will actually park most of their money in the indices, real estate and bonds and risk smaller amounts in these small pools or hedge funds. They don't get rich or richer because they all have a private phone line to the Fed... Money is made following the primary trend, not trading every wiggle anyway... - kisa

[qqqqtrdr]

Kisa: I trying to trade the wiggles. I think money can be made there. The wiggles on intraday forget it. I'm trading in and out a couple times a month. Barry

[toni]

The fact that there is a low probility of something happening does not mean it won't happen. The hedge funds hedge out all but a tiny risk. Then leverage up to 20 or more times their capital. Then their return is 1% times 20 or more. They have a very high probabality of making money. But that tiny unhedged market risk is still there. There models may say that it will only happen once in 20000 years. But it seems to happen far more often than that. On a regular basis. And with 20 times leverage their capital is wiped out with a 5% loss. They will lose 40% with a 2% loss. At hundreds of trades a day(hundreds of years a day) that 20000 years goes fast. And that unhedged risk is waiting out there for them. It is not a question of if they get hit it is a question of when. Then they blow up. Not if, but when. There is only one way to increase market return. That is by increasing risk. And using 20 or more leverage and paying 2 & 20 those "accredited investors" are not smart money. I think they are dumb money. Again there is no increase in return without an increase in risk. Which brings us right back to Modern Portfolio Theory. No free lunch. toni b