John Wasik

Why hedge funds don’t live up to their name

Feb 6, 2012 20:47 UTC

By John Wasik

(Reuters) – In theory, last year should have been a great time to be invested in a hedge fund. With markets gobsmacked by U.S. and euro zone crises, what better way to protect your money than to hedge against the market — the nominal premise behind a hedge fund? Managers can be defensive and pick the sectors or countries that will do well when most of the market is sour. There’s a big catch here: Success depends upon whether managers guess which sector won’t decline or manage to retreat to bonds at the right time.

And hedge funds definitely got caught in the net in 2011.

Most hedgies guessed wrong last year or stayed their own doomed course. Like most actively managed investments, hedge funds fell victim to the myth that you can predict — and avoid — market gyrations on a regular basis. Except for fixed-income funds, every other category of hedge funds lost money in 2011, and all told, the sector lost about 5 percent. Depending upon which hedge fund strategy you bought into, you could’ve done even worse. Some 75 percent of funds in emerging markets lost money. India and emerging Europe were among the worst categories. Only Brazil was a winner among the developing countries.

Meanwhile, the passive S&P 500 Industrial Index gained about 2 percent on a total return basis, according to the HFN Hedge Fund Aggregate Index. You also would’ve been better off holding a portfolio of plain-Jane U.S. Treasury bonds.


Like consistently winning the Super Bowl, it’s difficult for a hedge fund manager to beat the market. Because of their fees, they’re always starting behind the eight ball. Hedge funds charge up to 20 percent for performance (as a percentage of profits), and up to 2 percent for management — dwarfing the management fees of passive stock-index funds, which charge as little as 0.07 percent for total annual management.

In a new book entitled “The Hedge Fund Mirage,” author Simon Lack said real investor profits were a negative $308 billion from 1998 to 2010. In 2008, when hedge funds should have been protecting investors’ funds, they consumed nearly all of the profits earned in previous years.

Do big dividends signal big troubles?

Feb 3, 2012 18:08 UTC

NEW YORK (Reuters) – Last year, the dividend-growth strategy was a speedboat navigating the doldrums of the stock market.

While plenty of investments sagged from the European and U.S. debt crises, a portfolio mostly in healthy companies paying solid dividends beat practically all comers. Although the Standard & Poor’s 500 stock index was flat in price return last year, dividend-oriented funds like the Vanguard Dividend Growth Strategy gained 9.43 percent.

Dividends are usually a good bulwark against most market storms, especially for income-oriented investors. Yet the overall strategy may not do as well in 2012.

Want to narrow the tax gap? Raise capital gains rate

Jan 27, 2012 16:15 UTC

By John Wasik

(Reuters) – If the president and Congress are serious about income equality and cutting huge breaks for the wealthy, they should raise the capital gains rate.

While the president didn’t mention it by name in his State of the Union speech on January 24, it’s one of the many gorillas in the tax reform room.

There’s no question that the 15 percent rate on capital gains and dividends largely favors super-wealthy taxpayers over wage earners. Just look at Mitt Romney’s tax return. As former Labor Secretary and economist Robert Reich once noted: “It’s a loophole large enough for the super-rich to drive their Ferraris through. About 80 percent of the income of America’s richest 400 comes in the form of capital gains.” (link.reuters.com/gen36s)

What the State of the Union means for your wallet

Jan 25, 2012 16:15 UTC

By John Wasik

(Reuters) – While Americans might get a little break in their payroll taxes through the end of this year, greater financial relief for workers will be elusive. After the State of the Union speech by President Obama on Tuesday night, it’s clear that the wizard will still be hiding behind the curtain.

The best evidence of this was when President Obama invoked the progressive intent of the proposed Buffett rule to tax millionaires at a minimum 30 percent rate marginal rate – about twice the effective rate that Mitt Romney, the GOP presidential candidate, has paid in recent years.

It was obvious from the antarctic glare of House Majority leader Eric Cantor and the twitchiness of Speaker John Boehner that President Obama had a better chance of launching a mission to Mars in this caustic election year than gaining any ground on progressive tax reforms.

Lazy returns: How my Nano portfolio beat the S&P 500

Jan 23, 2012 19:16 UTC

By John Wasik

(Reuters) – I’ve never thought that laziness could be a virtue, but when it comes to investing, it’s often advantageous. You can trade too much and become too pre-occupied with the headlines and business TV shows. It can drive you crazy and you’ll lose lots of money making bad decisions.

Or you can set up a lazy Nano portfolio, which I proposed years ago – and forget about it. Based on my initial plan at MyPlanIQ (link.reuters.com/qus26s), a web-based application to help manage retirement accounts, my hypothetical Nano portfolio returned 7.4 percent in their tactical asset allocation model in 2011.

In contrast, the S&P 500 posted a tiny loss for the year.

I paid so little attention to my Nano last year that I only knew what it returned when MyPlanIQ sent me its independent year-end tally last week. I have no relationship with the site, nor did I ever ask them to monitor the portfolio. They calculated the returns and tweaked the allocations using their own tactical asset algorithm to get better results with fewer funds. While I hold some of the funds in my family’s portfolio, I don’t manage other people’s money. I’m skittish enough managing my own.

Underwater homes deal may be economy’s saving grace

Jan 20, 2012 19:27 UTC

By John Wasik

(Reuters) – You’re underwater on your mortgage and falling behind on payments. You may lose your home. Can you negotiate with your lender to reduce your principal?

Increasingly, the answer is yes, although still only in rare cases.

In what could become a national policy to stem foreclosures, principal reduction is a strategy you should pursue if your lender is open to the idea. It could also give a boost to the U.S. home market, which saw a spurt in existing home sales in December. (link.reuters.com/xap26s)

The potential number of homeowners who could be helped by this strategy is huge: About one in five mortgages are currently underwater, representing about $700 billion in negative equity, the Federal Reserve estimates. Many of those homeowners go into “strategic default” and foreclosure because it makes little or no economic sense to pay on a mortgage that’s worth more than their home. Up to 1 million of these homeowners may be allowed to do principal writedowns if state attorneys general reach a settlement with banks over questionable foreclosure practices, said Shaun Donovan, U.S. Housing and Urban Development secretary. (link.reuters.com/vun26s)

5 reasons to invest in 2012

Jan 17, 2012 16:25 UTC

By John Wasik

(Reuters) – If you want to be optimistic about investing this year – and there are plenty of reasons to be – you need to understand the tale of two economies.

One narrative is the recovering U.S. economy: Robust corporate profits, increased manufacturing, slightly more hiring and continued global demand. The other story tells of a hobbled euro zone, a possible slowdown in China and the prolonged misery of the U.S. housing market.

Which tale do you choose to believe? I’m loath to forecast which scenario will dominate because both will play out in varying degrees. The euro zone downgrades last week(link.reuters.com/pyw95s) are certainly going to reverberate in the markets, so if you’re over-exposed to European debt and stocks, pare back. In any case, you should be upgrading your portfolio to grab growth and income while reducing risk.

COLUMN: The troubling fine print of Suze Orman’s prepaid card

Jan 14, 2012 00:56 UTC

By John Wasik

(Reuters) – Can those celebrity-linked prepaid cards really help the unbanked?

Lately there have been a spate of them, from Kim Kardashian’s to Lil Wayne’s. When it comes to that newest one, the Approved Prepaid MasterCard issued by the Bancorp Bank and endorsed by personal finance personality Suze Orman, who is also an investor in the product, less is not necessarily more. There are better alternatives.

First, a disclosure. I knew Orman well before she became brand-name famous (we’re both from Chicago) and she even wrote a blurb for my book, “Late-Start Investor,” in 1998. She’s generally done some good things for financial consumers.

Playing the “January effect”

Jan 9, 2012 19:33 UTC

By John F. Wasik

(Reuters) – For years, one of the more bankable phenomena in finance has been the January effect.

The premise is simple: Institutions and traders sell off stocks the end of the year for tax reasons and portfolio dressing. Then they start buying again in January, often favoring small companies, also known as “small caps.”

With myriad signs that the U.S. economy is in recovery, this may be another good year for the January effect. Even if it isn’t – and I refuse to make predictions for short-term traders – it would be a good idea to add bargain-priced small caps to your core portfolio through index mutual funds or exchange-traded funds (ETFs).

The old abnormal: How even PIMCO’s Bill Gross can err

Jan 6, 2012 17:33 UTC

Jan 6 (Reuters) – No matter what theme you adopt in a
market forecast, predictability has always been a bugaboo. Just
ask Bill Gross, the legendary manager of the PIMCO Total Return
bond fund.

Gross’s $244 billion baby saw at least $5 billion in assets
flee in 2011, more than $1.4 billion in the fourth quarter
alone. Relative to the size of his fund, this is a notable vote
of no confidence ().

Investors voted with their money because of Gross’s bet
against U.S. Treasuries last year. Like many of us, he digested
the headlines and became dyspeptic over the Congress defaulting
on its debt, sluggish economy, the S&P credit downgrade and
euro zone debt woes. Yet what actually happened didn’t follow
Gross’s “new normal” script. Instead we got the “old abnormal”
of unpredictability.