The Great Debate UK
from The Great Debate:
As an investment strategy, making private equity and hedge fund managers rich is a probable loser. As a tax policy, it is a guaranteed one.
The U.S. House of Representatives passed a bill last week that would raise the taxes that private equity and other investment managers pay on "carried interest," their share of the takings when a holding such as a startup or turnaround is sold at a profit.
Carried interest is currently taxed at the lower capital gains rate, meaning that many private equity barons can pay less in tax than the people who clean their swimming pools or mind their children. This is patently unjust. Carried interest is compensation for labor, earned income in other words, rather than gains on capital that might be lost.
As you might expect, the private equity industry is not happy:
"Remember we manage money for union employees, for corporate employees, for teachers, firemen and the like and our job is to help these unions and pension funds protect their employees when they retire. This is why private equity needs to have the treatment we have to attract the best and brightest to this sector." Robert L. Johnson, of private equity firm RLJ Companies told CNBC television.
You might have thought that, with the Eurozone in turmoil, the EU would have its hands too full to pursue its vendetta against hedge funds.
Far from it, the latest proposals are even more wide-ranging than most observers anticipated, involving the establishment of a Europe-wide regulatory authority with the power (presumably) to dictate to the FSA how to police the UK financial sector, restricting the ability of hedge-funds based outside Europe to sell inside Europe and making it hard for European investors to invest in the rest of the world’s so-called alternative investment vehicles.
from Global Investing:
Hundreds or even thousands of "active" fund managers are competing to add alpha to beat benchmark indexes, be it in stocks, bonds or alternatives.
The market is so efficient, historical performance is no guide to the future. It's nearly impossible to find a reliable method to pick advisers who deliver the best industry returns year in and out. There are also costs, from visible ones such as management fees and custody and administration expenses to "below water" costs such as trading commissions (due to higher turnover), bid/ask spread (price to buy, another to sell) and market impact costs (larger buy/sell orders affecting price).
Hedge funds watching China's markets are licking their lips at what they see as the best shorting opportunity since Enron. But while plans to allow short-selling are imminent, this won't be a bear's picnic. Beijing's plans to allow two-way equity bets will give foreigners little chance. Borrowing individual stocks will be tricky, even for locals.
After many countries such as the United States and UK put more severe restrictions on short-selling, China is taking the contrarian view. The short-selling regime has been three years in the making. The goal is to allow investors to express a different view on the market, and prevent market valuations getting overly stretched.
Only foolhardy parents would allow their children to reveal just the grades on their report cards they were happy with. Yet hedge funds are given this luxury in reporting their performance to compilers of sector-wide performance indices. The result is that while a single fund's track record is clear enough, hedge fund index returns still flatter the average fund. Investors would be smart to call for a clean-up.
Taken at face value, historic index figures suggest that even a very average hedgie can easily beat the stock market while taking less risk. Since 1990, a weighted index of hedge funds has returned around 12 percent annually -- about 4 percentage points more than the S&P 500 -- with just half the volatility, according to Hedge Fund Research.
from Funds Hub:
Guest blogger Robert Olman is President of Alpha Search Advisory Partners.
The views expressed here are the author's own and do not constitute Reuters point of view.
The ‘perfect storm’ of 2008 revealed several flaws in the hedge fund model.
With the decision by multiple funds to drop their gates in response to a tsunami of redemption requests, the mismatch of the liquidity in the funds’ investment portfolio and the liquidity provided to the investors became apparent.
from Funds Hub:
For better or worse, hedge fund returns have a tendency to follow markets, in part because most long-short funds are net long most of the time.
So after a huge rebound in the stockmarket this year, which has helped hedge funds make up some much-needed ground, October proved a difficult month when the market fell in the second half of the month.
- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -
We could see it coming, couldn’t we? Those gigantic over-leveraged hedge funds were bound to come crashing down, as their massive bets turned sour, forcing them to default on their bank loans and bringing the banking system to its knees.
Well-intentioned legislation often has the opposite effect. The European Commission’s new alternative investment directive threatens investment trust companies, an attractive form of pooled investment.
The Commission aims to “enhance investor protection.” However, in addition to hedge funds, the original French and German target, investment trusts would be caught in the new regulatory net. Unlike other pooled funds, investment trusts offer transparency, low fees, the discipline of a public limited company and a vote.
Raymond Baer is splitting the family firm. He has noticed the conflict between the private bank and asset manager. Or, as he puts it, “both entities will benefit from their sharpened focus and the absence of competing interests, thus acting pro-actively in the best interest of all of our stakeholders”.