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December 21, 2008
Money managers are a complete scam!
Ever since this Madoff thing became news, I've been thinking a lot about the value of "professional" money managers as I'm sure lots of you folks have too.
I've concluded that the whole business is a fraud, since no money manager can outperform his respective index in the long term, yet fees are charged none the less.
In my opinion, no fee index funds are the only rational means of investing in the stock market, unless you're a gambler and want to pick individual stocks on your own for fun.
Hedge funds are probably the biggest scam of all since their managers charge the largest fees and just like mutual fund managers can't outperform the markets, except on rare "by chance" occasions.
Is professional money management the next big business to fall?
It's so damn easy to diversify on your own with a handful of index funds, why do folks pay more to do worse? I don't get it.
Comments
I agree, and have all my many bezillions (cough) in no-fee mutual index funds. Can't say any of them have ever performed great.
There are some clever things hedge funds can do that ordinary investors cannot. However, with so many hedge funds now all doing the same thing, perhaps this advantage exists no longer. And in a declining market, I would think no one's immune from negative returns.
Posted by: mopar at December 21, 2008 8:02 PM
And Eric Tyson says the same thing in his book "Personal Finance for Dummies."
Posted by: mopar at December 21, 2008 8:03 PM
It's amazing how little information is available for free on the web on hedge funds. Even if most are not outright Ponzi schemes like Madoff's, the fact that there's so little public information on them leads me to think that Madoff isn't the only criminal in the business.
There must be a concerted effort out there on the part of the hedge funds to keep things secret in order to promote the same aura of exclusivity that Madoff counted on.
And what's up with funds of hedge funds? They charge high fees on top of the fees that their underlying hedge funds charge. Seems totally nuts to me . . .
Posted by: IronBalls at December 21, 2008 8:44 PM
Hey IB, while I agree philosophically, there are some dangers in this strategy for the markets as a whole.
If all investors strictly bought index funds, it would be impossible for corporations to raise capital, as no stocks would be bought unless they were part of an index. However it would result in a new form of gambling and arbitrage: folks would buy stocks based on whether they were in line to be added to an index. As I'm sure you're aware, stocks added to the S&P 500 jump from 2-5% when they are added to an index since index funds are required to buy the new stocks, increasing the demand and hence the price.
Mopar, there are hedge funds that have done very well in bad times. And, there are ways you CAN make bezillions in a declining market, that are simple and available to anyone with a brokerage account. You just have to have the balls to buy them and the smarts to time them. Neither of which most people have, including myself. But go to proshares.com and study the ultrashort etf's they (and others) offer.
And, speaking of ETFs, if you are going to mark to an index, imo ETFs are much simpler and cheaper than mutual funds.
Posted by: denton at December 21, 2008 8:55 PM
Our investment strategy is one of smaller market capitalization stocks which are poised for growth. Our benchmark index is the Russell 2000. That index is down 26.5% YTD (S&P MIDCAP -39% and S&P SMALLCAP -34%). Our long only investment funds are down 19% and our long/short hedge fund is down only 13% YTD.
If you'd like to invest with a firm that has a proven 15 year record of beating our benchmark...AND 3, 5, & 10 year positive absolute returns then send me an email.
bklynsocialclub@yahoo.com
Sorry, no accounts less than $1MM
Posted by: daveinbedstuy at December 22, 2008 9:24 AM
And what does it cost for the privilege to invest with your fund Dave?
Posted by: Splenda at December 22, 2008 9:45 AM
1.5% management fee for the long only accounts and for the long/short hedge fund a 1.5% management fee plus 20% of the upside. The 20% fee doesn't kick in until any prior losses are recouped..referred to as a "high water mark." Pretty standard fee structure.
Posted by: daveinbedstuy at December 22, 2008 9:52 AM
A half way decent stock broker can help you hedge your portfolio as well and doesn't get ANY OF YOUR PROFITS, just a commission when you make trades.
The Madoff fiasco is going to crack the hedge fund egg wide open. Investors are going to demand complete transparency and much lower reasonable fees.
Also, all this BS about not being able to invest unless you put up $1,000,000 or more is a purely Madoffian ploy to attact big money and big fees.
The very weathly are now waking up to the fact that they're better off just parking their money with low cost brokerages like Vanguard and Schwab that won't steal from them.
Dave, the game's almost over.
Posted by: IronBalls at December 22, 2008 2:36 PM
And you'll get market returns...down 41% YTD...we, and others, have long term records of outperformiong those market returns. If you don't want that and don't want the fees; fine, go elsewhere and get market returns.
That said, everyone needs to get advice. Diversification is something that cannot be stressed enough.
Posted by: daveinbedstuy at December 22, 2008 3:18 PM
That's not true, Dave.
Hedge funds, just like mutual funds, underperform their benchmark indexes over 50% of the time.
Taking fees into account, investing in hedge funds makes ZERO sense.
I know you're trying to make a fast buck, and I respect that, but you can't convince me to throw away my money . . . that's for sure!
Posted by: IronBalls at December 22, 2008 3:39 PM
Ours hasn't.
"Taking fees into account.." We don't take anything more than the 1.5% if there's no profit to the client.
Start a thread on a subject that you know something about.
Posted by: daveinbedstuy at December 22, 2008 4:16 PM
Dave- I would'nt invest with you because you spend way too much time on brownstoner. Sorry.
Posted by: billyboomer at December 22, 2008 5:37 PM
Dave,
You've got a typical Madoffian superiority complex going on.
Why the hell would somebody want to pay you 1.5% NOT to have a profit, not to mention an additional 20% of their profit if they're lucky enough to see any?
Seriously, dude, the hedge fund profit model has scam written all over it and the Madoff scandal is exposing the truth to everybody.
I don't know much about complex financial tools, but I understand the fundamentals of investing pretty well.
Hedge fund managers like yourself like to pretend they possess some secret to the market that nobody else knows and that for the right price, you'll happily grant them entry to the "club."
It's all a big scam, and you know it. There is no "secret." If there was, you wouldn't need investor's money because you'd be the richest guy on the planet.
Posted by: IronBalls at December 22, 2008 6:29 PM
Performance speaks for itself. It is audited as well, not like Madoff. If you don't believe the numbers then that's your problem. Walk away.
IronBalls I suspect you have a short man's complex.
Posted by: daveinbedstuy at December 23, 2008 9:37 AM
Madoff has made it abundantly clear to the entire world that performance doesn't "speak for itself."
Any economist will tell you the market can't be beat in the long run without insider information or some other illegal tactic.
Simple diversification and dollar cost averaging over time is the only rational way to invest in the stock market.
And Dave, the only complex I have is that I can't stand scams and dishonesty.
Maybe you should open a cafe or something in Bed Stuy. Selling coffee and donuts would be an honest way to make a living and you could chat all day long with your customers.
Or how about a dive bar?
Posted by: IronBalls at December 23, 2008 11:35 AM
Now didn't Madoff give 10-12% per year for many years? He had a track record. I doubt Dave is in that arena, but I don't have a mil lying around to find out. Unless he wants to buy 1,000,000 in architectural salvage inventory.
Posted by: Iknow at December 23, 2008 1:11 PM
I agree 100% with Iron Balls. I beleive hedge funds are a total scam. They tout their wonderful returns, but due to the fact that they don't have to fully disclose everything, they manipulate the numbers to make their returns look artificially high. That being said, I just dont get why someone would pay 1.5% PLUS 20% of profits. Seems insane to me. The best hedge funds though are the ones that are simply funds of funds! So, in effect, you are paying someone to simply choose what other hedge funds they invest your money in! Give me a freaken' break.
Posted by: Splenda at December 23, 2008 2:08 PM
DIBS - if all hedge fund managers have as much time on their hands as you do, then if i had a 1M to invest i would put it in a CD which would give me interest, zero losses and i wouldn't need anyone to watch it. sorry but all your time on this site gives your biz a bad name and for once i would have to agree with ironballs - eventhough he voted for mccain. lol.
Posted by: bkny at December 23, 2008 2:13 PM
bkny,
The problem with CDs are that the interest is so low that inflation usally makes your gains meaningless.
I think real estate, as long as you don't pay too much for it, is a better investment and usually keeps pace with inflation.
The days of making fast money in real estate or the stock market is over for most of us, but we can still do ok if we think long term instead of being greedy and trying to get rich over night.
Posted by: IronBalls at December 23, 2008 6:38 PM
Dave,
I have a lovely bridge to sell you. It connects Manhattan and Brooklyn. And it outperforms all other bridges.
Since you're such a whiz, I thought you'd recognize a great deal when you saw one. We all know that financial gurus are hanging out on Brownstoner.com forums...
Posted by: zuzubird at December 23, 2008 8:54 PM
iron balls - i know, i was joking. i would never put 1M in a CD. i was just trying to make the point that it would be better than investing with DIBS. i find it very hard to believe he is some top hedge fund manager. living in bed stuy and spending all his free time on brownstoner. maybe he works the reception desk for the company and no one is calling or walking in...
Posted by: bkny at December 24, 2008 10:39 AM
bkny,
Given the option, of course I'd rather put my cool million into a cd too.
But if DIBS were the valet at a good steak house, I'd give him a big tip as long as he didn't scratch my Benz.
(I don't actually have a Benz. I'm just saying . . .)
Posted by: IronBalls at December 24, 2008 6:44 PM
Hold on to your cash, put it in a CD for now. I know banks are paying close to nothing but they can not keep interest rates so low for ever. Look at what low interest rates did to this country. I think a home is still a good investment but do not buy just yet because homes have only started to come down in New York. Remember it is easier for you to see the value in your home where as with a money market manager you are just giving your blood to a parasite. Money market managers are very similar to real estate agents. In an up market they are all geniuses. In a down market they beg for help from the government.
Posted by: hannible at December 25, 2008 8:29 AM
hannible,
I'm not sure about money market managers being like real estate agents, but I agree that now is the time to sit tight and wait.
Sellers will take months to drop their prices to levels that will get homes sold.
Once you can buy a house and have the monthly mortgage payments approximately equate what you'd get if you rented it out, I'd say the market has hit bottom.
Until then keep renting, shop over the internet for the lowest prices, and drink plenty of cold beer.
Posted by: IronBalls at December 25, 2008 11:50 AM
Read "all about asset allocation" by richard ferri and do it yourself better.
Advisors cannot beat the market. Buy the indexes and create an intelligent asset allocation plan.
Posted by: MoneyForNothing at May 15, 2009 2:44 PM
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