On October 1, a day after the Dow rallied 486 points, I suggested that if you need your money in the next six years it might be worth considering making the switch from equities to cash. This comes to mind in looking at the latest news on hedge funds. They control $1.7 trillion distributed among 10,016 firms -- 217 less than three months ago. And based on how much they get paid -- 2% of the assets they manage plus at least 20% of the profits -- they are considered "smart money."

Thanks to the hedge funds' reversal of fortune, the markets are suffering. Why? Because assets are fleeing hedge funds -- down $180 billion. And the profits do not exist -- the funds are down an average of 17.6%. Among these funds, one that stands out is $14 billion SAC Capital Management. I am not sure when SAC did this, however, it is now almost 100% invested in cash. When trying to assess how hard it is to make money in the market, it is worth considering that one of the most successful investors in the world is not willing to put money into stocks.

Why does this matter? Hedge fund money flowing out of investments to meet shareholder redemption demands is behind many of the biggest swings in the financial markets. For instance, the 25% rise in the dollar and the 54% drop in the price of oil since July may be due to hedge funds and other speculators unwinding a formerly profitable trade -- buying oil and shorting the dollar. And the decline in the value -- from 85 cents to 66 cents on the dollar -- of the $500 billion market for leveraged loans -- used to finance LBOs also reflects hedge fund selling.

Continue reading Should you follow hedge funds' move into cash?

Should you follow hedge funds' move into cash? originally appeared on BloggingStocks on Thu, 23 Oct 2008 11:50:00 EST. Please see our terms for use of feeds.

Fishing for returns... and coming up empty originally appeared on BloggingStocks on Thu, 17 Jan 2008 18:59:00 EST. Please see our terms for use of feeds.

The Wall Street Journal is reporting on the development of the hedge fund clone concept being created by big Wall Street firms. These clones basically try to earn the returns of hedge funds without paying the normal 2/20 fee structure.

For those unfamiliar with it, 2/20 refers to an annual "management fee" of 2% and a performance ("incentive") fee of 20%. When compared to any index fund, and even mutual funds, these fees seem ridiculous. However, there are many funds in the hedge fund industry that do in fact justify these fees.

The goal of these funds is basically to mirror the hedge fund index, or a group of hedge funds pooled together to be more diversified than investing in a single hedge fund. While this strategy has its benefits in reducing volatility and the chance of a blow-up, it also has its downsides. According to my friend James Altucher, fund of funds manager and president of StockPickr.com:

"Hedge fund clones are fine because they are all mediocre (i.e., like the average hedge fund). The real reason to go into hedge funds is to find the next SAC."

Basically, the returns of the "clones" will not match the returns of the best and brightest hedge funds on the street, such as SAC, Moore, or Tudor.

While this seems like an interesting proposition, the minimum investments remain very high at this point so the concept doesn't really bring much to the table for investors who are not accredited. As the WSJ said, this seems like another investment for the yacht-club set.

Hedge fund clones: Who are they for? originally appeared on BloggingStocks on Sat, 21 Jul 2007 13:40:00 EST. Please see our terms for use of feeds.

Carl Icahn has reduced his holdings in Time Warner Inc (NYSE:TWX) by roughly 30 million shares from the 55 million he held as of the prior filing, according to my analysis after adding up the numbers from the Securities and Exchange Commission filings this morning and after comparing it to past notes.

How many shares is it exactly? Icahn himself may not even be able to tell you. This selling includes hedge fund SAC and other holders as well and should be no huge surprise after the rise in the last four months of 2006. Shares have been under some pressure after reaching $23 and after the cable delays began, so this should also have been somewhat known.

The one issue to note here is that none of these shares were ever really sold in a huge flood and no selling seemed coordinated. Very frequently, large professional investors all bail out en masse. But while many have apparently reduced their stakes in TWX, the stock was not dumped in force.

Also keep in mind that these filings all have a time lag. So it is very possible that the real holdings are different than stated. With the gains Icahn has made and with the investments he has also made it would not be a shock if he has sold more -- or even all -- of his TWX holdings.

Icahn pairs back on TWX holdings originally appeared on BloggingStocks on Thu, 15 Feb 2007 11:59:00 EST. Please see our terms for use of feeds.