Bullitt

I recently read an article by a Hedge Fund manager who seemed overly confident in his decision to be buying up certain types of bonds that have almost a 'guaranteed rate of return'. Yes, this trader has done exceptional in this mess, but a there's a few things I had to shake my head about. He claims to not to benchmark his returns but instead just makes money.

Most mutual funds today, for example, benchmark to a Lipper Fund Index of comparable holdings. Benchmarking a Small Cap fund to the EAFE Index is kind of like comparing somebody's summer league softball stats to that of Rob Deer's 1986 season with the Milwaukee Brewers. If one were to trade in and out of stocks within the S&P 500 and do better than the index after fees, well then, they beat their index or 'the market'. The key to this of course is 'fees'. Fees are covered in detail throught the MB for those who wonder what I mean but for the most part Index Funds charge the lowest fees for most investors looking to gain exposure in stocks.

This brings me to my main point. The purpose of Hedge Funds is to produce positive gains in up or down markets. In other words, seek Alpha, or outperform their benchmark. I think it would be hard pressed to find somebody out there that could provide a strong argument in the case of Hedge Funds thriving going forward like they did in 2006. Membership in Hedge Funds is supposed to be an elite thing. With low credit rates abundant throughout, anybody with a few big clients who could provide the capital was able to set up and run their own fund.

Hedge Fund managers easily trounced indexes and benchmarks by way of leverage in this past bull market. Lever up the trades and it will more than take care of any losses due to fees. Let's be honest. It appears that the credit markets have been fractured and inreparable for a few years to come. With the countless Hedge Fund blowups this year alone, the game hasn't really changed, but it's merely reverting to the norm. Hedge Funds should return to being a more elite, underground group not only because of the wealth destruction, but because with less funds to join, it won't be as easy as getting a membership to the local Moose Lodge. The ease of finding that coveted 'Alpha' should be gone as well. With Hedge Funds unable to lever up their gains, the strongest fund managers-the ones who truly have a knack for trading- will survive for a long time to come and will continue to make great investment decisions. These are the ones who will prove whether or not True Alpha (minimal to no leverage against the benchmark) really does exist. The weak will be washed out by way of simple evolution.

I do see some new laws enacted to improve the transparency in Hedge Funds due to the rage and finger pointing amongst investors, but like most ideas they will only prove to be reactive in nature. Most Hedge Funds will be wiped out by Mr. Market anyway before the FTC can get their hands on them.

As always, the market is the 'final arbiter'. It always has and always will find a way to flush out the excesses (in both directions).

-Thanks for checking in. Your questions and comments are always welcome.