TheStreet.com's Jim Cramer says that it should have been obvious to many more hedge fund managers that things were going totally awry.
Something better go up besides job losses and Treasuries. The central theme of everything post the Lehman Brothers imbroglio is that everything goes down: corporate and municipal debt, M&A, stocks, commodities (particularly oil and copper), industrial production, retail sales, car sales, home sales, you name it.
In that world, no one can make money, except people who are short everything, and, judging from most hedge fund returns, that ain't working either. I mean, where is it written that hedge funds should be taking losses in this environment and gating themselves? I would suspect that cautious or negative hedge funds should be up huge in this environment. That's what they are paid to do.
If they aren't up huge, maybe the managers should come up with another calling.
I look at this because when I examine the newspapers and web sites this morning, I realize that there are instruments to short pretty much everything that's out there, from bank debt and commercial mortgages to residential mortgages and commodities. Yet, day after day, I read about these hedge funds that have to gate people, and I wonder why they all had such a long-side bias.
I have to tell you that when I ran my hedge fund, I actually tried to make a call, a worldview, on where I thought the world was going, and if I thought it was going wrong, I simply bet against it, not unlike what you see Doug Kass write about every day. We even have tons of instruments that let you double your bet against sectors. How could these hedge fund managers not see so many of these disasters coming simply from looking at their own book of business?
I am no genius. I made a lot of mistakes when I was a hedge fund manager, but I can't believe how many managers simply borrowed a lot of money cheaply and then bought things, anything, and bet they would be able to profit simply from the arbitrage. Most of these bonds that are in trouble were simply high-yielding bonds that were bought with low-yielding borrows from brokers. That was really the only "trade" that so many of them did.
Many of them had to sell everything else to fund these trades.
Of course, others simply got things wrong because they bought stocks, any stocks, and stocks as a class, not as a sector, got killed.
This year should not have been a disaster for so many funds. The only investors that have a real excuse for losing huge amounts of money were the investors in Madoff.
But it didn't happen.
I don't blame investors for wanting their money back. The vast majority of funds simply failed to deliver on their basic function, which isn't to "hedge" but to find a way to make money, regardless of the direction of assets. In the end, most of these hedge funds just acted as more cautious, more hedged, mutual funds.
It just makes no sense to me.
It just seems like one gigantic fraud, not of the Madoff variety but of the expectations variety of an asset class.
Sure, there were spikes up, exaggerated spikes, but hedge funds that caught either side of the spikes should have had great years, all the more reason why the gating is such an outrage. Down 40% in 10 months? What an opportunity!
But, oh, what a failure!
I think 2008 will go down as a year when it should have been obvious to many more hedge fund managers that things were going totally awry. As someone who started my fund in 1987, I always thought that there were a lot of guys who got in the game at the tail end of my tenure and simply made their money by being long something, and the guys who really cleaned up were the guys who were double or triple long.
I was right.
In the end, the best bet in 2008 may have been to bet against the hedge funds. Too bad we didn't have a Pro Ultra Bear Hedge Fund ETF in which to invest. Now that would have been something worth buying.
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Jim Cramer is co-founder and chairman of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO.
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Reader Comments (Page 1 of 1)
12-24-2008 @ 9:44AM
Virgil Bierschwale said...
The answer is simple.
They have spent all of their time focusing on how to make money when things are going up and they've created derivatives that arent worth the paper that they are written on so that they could trade more.
Now that things are not going up, they do not know what to do because they have never tried to make a living on the down side.
Whats sad is that it is these same people that have encouraged the dismantling of our infrastructure to manufacture goods saying that we don't need that because we can make it offshore cheaper and our people will find similar or better paying jobs.
Well our people arent finding similar or better paying jobs and its starting to show up in companies such as Toyota that depends on Americans to buy their products.
Problem is, when Americans are out of work or making substantially less money, who is going to buy the products ?
One interesting statistic that I noticed the other day when preparing an article titled "Fox Business News" was that the middle class, people who make more then 50,000 and less then 200,000 actually comprise the majority of all purchases and taxes here in America.
So it should be no shock now that we are also advocating sending the middle class jobs offshore that we are starting to reap the seeds that we have sown.
Just as our hedgefunds are doing.
Virgil
http://www.KeepAmericaAtWork.com
12-24-2008 @ 9:56AM
nick said...
Crammer what we need is a complete investgation of people who are on Wall Street, manly Jews who have been stealing from the poor folks putting a little in 401k's and then the Wall Street thugs worrying if they will get to Vale to go sking two or three times this year. These Wall Street thugs making millions and living the high life, CEO's running their company to the ground, and people like GEN POWELL who you drop to your knees for being on boards and they don't have a clue what is going on, but they get 100 of thousands a year just for showing up with the rest of the elite crowd. And you wonder why were pessed off out here in small town America.
12-24-2008 @ 10:39AM
AndyB said...
Hey Cramer-
Aren't these funds on average still outperforming the market? I don't have the numbers in front of me, but with the broader markets down 40 - 50%, shouldn't a manager get a pat on the back for losses of only 10 or 20%? I realize the goal is to make money regardless of the direction of asset price moves, but I think the story here is that most of these funds' strategies (quant funds, statistical arb funds, corp bond arb funds, ... ) fare poorly in the highly distressed and volatile markets we've seen in the past 6 months. Maybe the macro funds dropped the ball, but I think once the current conditions in the market return to a level of normalcy (if there is such a thing) the other strategies will start being profitable again. As for the the guys playing the macro game - I'm with you. What happened?
12-24-2008 @ 11:08AM
BHarrison said...
The apparent truth is that these hedge funds only do well in a somewhat steady market with sector fluctuations. When the bottom drops out of the market, they have no way to make money when no one is buying, not even at the lower end.
Haven't hedge funds reached the end of the market like the "derivatives" . . . there aren't even any buyers at the bottom of the market. Basically it apears that the vast majority of the market activity are the "insiders" trying to manipulate the market to get something going . . . and it simply is not working.
Most people think or realize that the market is not going to bottom out until the latter part of 2009 or even into 2010 . . . Who is going to buy into a declining market?
The only solution to all of this is to restore INTEGRITY into the markets via reasonable and prudent regulation and reasoanble oversight in all of this chaos. There cannot be, and will not be "faith and confidence" in the market until this is provided . . . otherwise it is merely a Las Vegas market for the average investor.
The intelligent American people are NOT going to invest in the market under the current conditions. As even Cramer said in one of his recent articles, the ONLY SAFE HAVEN now is cold hard cash in hand", ready for when the market eventually turns.
The recovery is going to be a long and arduous process . . . but we are a long way from the "bottom" at this point. It will be calamitious form many; but we just need to let the regualted free market economy run its course. Some will be winners, some losers . . . right now we just have a lot of "previously wealthy" insiders trying to hold on to what they thought they had . . . but many of them are going to be losers at the end of this trip. (And they deserve to be losers for what they have done to our and their markets/economy.)
Everyone thought that there couldn't be another type of Great Depression . . . and many are still saying THAT can't happen. But as nothing that the government is trying to do is accomplishing anything, then "anything" is possible . . . radcial changes in our society, economy, and the markets are going to occur.
Obama has stated his desire/intent to establish an internal "National Security Force", reportedly to be used for protection against "terrorsim"; but would more likely become a force to deal with chaos and civil unrest if everything worsens to the 1930s levels.
. . . and to the naysayers about all of this, well, aren't they the same ones who claimed that none of this could have occurred, right?
12-24-2008 @ 2:20PM
beachpaul said...
Mutual Funds have been the biggest scam to ever come out of Wall St. Everyone who bought into them was a sucker. Look at your 401k? It'll take ten years for that to get back to even. Everyone wanted to abnegate responsibility. Let someone else manage my money. If something happens, it was their fault. Now the companies are saying they are suspending matching funds. Hey, fellow Americans, you should be angry. You have been fleeced. But you are not. Just put your head down, eat some more grass, and grow some more wool so you can be fleeced again. Just blame it all on Bernie. Yeah, Cramer, thats the ticket, those hedge fund guys are all stupid. They just got lucky. Smoke another one, Jimbo, and stop blowing it in my face.
3-13-2009 @ 1:10PM
falsehood said...
PEOPLE are you all this stupid. How can we invest in to a market of thieves. This is what happens when you deregulate banking, accounting, loan rules and potocols. Deregulation has created corruption and thievery of assets form 401-K plans and pensions, by unregulated hedge funds with out any over site at all. Hedge funds that create rumors and manipulated values of companies and stocks. I call that, manipulating the bet. Betting on a lose. I call it stealing. And do not for get that oil speculators were deregulated too. And do not forget that property values were manipulated by property speculators that were unregulated with no over site at all. Property, is over valued by 30% or higher. And who to blame Washington D.C. both political parties let this happen. Lobbyist's, greed and control. We have been sold out. Lobbyist's have helped deregulate the saftey net of our Nation. Are we thinking yet? Until they put these people that manipulated this market and this mess in jail. ALL BETS OF INVESTMENT ARE OFF. Untill they bring back good regulations and over site and remove any betting form hedge funds. On AIG how much, was bet on there lose. And we, the tax payer paid for it. Screw, the open and free market for who to manipulate.
1-18-2009 @ 1:41PM
purvaaz014 said...
Now all of these ignorants are trying to look smart(again). In my view either they are highly dishonest beacuse they never warned anyone about Mortgage bubble or unrealistic prices of shares( and made money like many others in past by giving intentionally wrong advise). Infact all they kept saying Buy , buy and buy more, or they are dumb , that they coulod not see whats coming . In either case they should leave this job of being pundits and experts . In my view they should find a job baging groceries in super Market.But on second thought I can't trust them with that either. I will hate find someone's else milk in my bag and my oranges missing . People and pundits like Jin and cadlow and many others please stop making fool of poor people . You do not know anything and you still trying to play God. Stop it and get off my TV Now.