January 2nd, 2009

(no subject)

"We are racing towards Chinese New Year and I suspect everyone is eager to put the Year of the Rat behind them. It is the first year in the cycle and is supposed to be a time of hard work and renewal. It ends in three weeks and will be followed by the Year of the Ox, which symbolizes prosperity through fortitude. We’ll see — fortitude will probably be necessary." --Prof. Michael Pettis

Plus ça change, plus c'est la même chose.

From an article on the hedge fund industry in the January 1970 issue of Fortune magazine: Cerberus was the three-headed dog who guarded the gates of Hell; the name, one dictionary says, also connotes "a watchful and formidable or surly keeper or guard."

After last year's bear market the words "watchful" and "surly" might also have been used to describe certain hedge-fund investors. Fortune has been able to find only a very few funds--most of the under $10 million in assets--that were in the plus column for the year. Many of the larger funds had dismal records: on the first of October, when the New York Stock Exchange composite average was down by some 13 percent for the year, the two Jones funds and City Associates were down between 30 and 40 percent.

Despite the weight of this and other evidence, some hedge fund managers have attempted to persuade their investors that 1969 wasn’t really as deplorable as it might have seemed. Charles E. Hurwitz, who runs three private hedge funds in Texas and also one of the largest public hedge funds, Hedge Fund of America, reminded shareholders of that fund a few months ago that ‘the hedging feature is designed to reduce losses in a downturn, not eliminate them’. Some stockholders must have shuddered to think where they would have been without the cushion. For at the end of November, in a tabulation of 379 mutual funds prepared by Arthur Lipper Corp., Hedge Fund of America's 24 percent decline for the year left it sitting in the 340th spot. Even then, it was some distance ahead of the oldest public hedge fund, the Hubshman Fund, whose cushion had not prevented it from losing 47 percent for the year and taking firm possesion of the 379th spot.

Alfred Jones, a candid and likable man, is one hedge fund operator who has not taken 1969 lightly. He has brooded about the year's catastrophes, and believes he can trace their causes. The trouble began, he says, in the 1966-68 period when the craze for performance swept the investment world and when all sorts of money managers, including those in his own shop, got overconfident about their ability to make money…Even Jones himself was caught up in what he describes as the “euphoria” of the times. He says he began to wonder…whether his hedging strategies, which has aimed as softening the effects of a potential market decline and which had therefore held back his gains in a bull market, might not have been misguided.

The debris of 1969 has naturally prompted some hedge-fund investors to ask just what it is that the hedge-fund concept is doing for them. If short selling does not afford protection in a down market, then why short at all? Why not instead retreat to cash when the market looks bad?

The next disastrous happenings may emanate from the SEC, which for years has been fretting about the hedge funds and which lately has been trying strenuously to arrive at some decisions about them....certain members of the SEC staff have already concluded that the Commission must take steps to regulate these funds. One staff member spoke recently of the "crisis numbers" to which the funds have grown, and there has been much SEC talk about the "impact" of the funds on the market.

It is hard to say what the SEC will do, and it is even hard to form an opinion as to what it should do. If wealthy, sophisticated investors wish to pay 20 percent of their profits for investment management--or, as one dejected investor put it, are "foolish" enough to pay 20 percent--then quite possibly they should be allowed to do so.</blockquote>