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The Ponzi Scheme in every hedge fund
- Thread starter patchie
- Start date
If you're scared of "unrealized gains", invest with managers who don't have any: High frequency traders. Managers whose average trade hold time is less than a week. This approach requires them to trade only those instruments with the highest liquidity; otherwise they'd get destroyed by slippage.
Following this rule, you would jettison venture capital, real estate, private equity, ultra small-cap stock, distressed debt, M&A "special situation", bonds, and emerging market equity managers. Most of the things that got killed in 2008.
Following this rule, you would jettison venture capital, real estate, private equity, ultra small-cap stock, distressed debt, M&A "special situation", bonds, and emerging market equity managers. Most of the things that got killed in 2008.
Quote from MGJ:
If you're scared of "unrealized gains", invest with managers who don't have any: High frequency traders. Managers whose average trade hold time is less than a week. This approach requires them to trade only those instruments with the highest liquidity; otherwise they'd get destroyed by slippage.
Following this rule, you would jettison venture capital, real estate, private equity, ultra small-cap stock, distressed debt, M&A "special situation", bonds, and emerging market equity managers. Most of the things that got killed in 2008.
Exactly!
Quote from talknet:
According to above statement Microsoft, Walmart and all other giant companies should be Ponzi because Microsoft's market cap is $252 billion and Wal-Mart is $245 billion. But these are unrealized gains.
To earn $252 billion, Microsoft must sell the company
Market cap is not Ponzi scheme because if it goes down that is not deliberate to scam investors but it is only due to market action.
The point here is not about realized or unrealized gain. Rather it is about liquidity. Any gain (realized or unrealized) is real as long as you can turn it into money - that is there is a counter party to trade with you without significant price adversion. Many long term unrealized gains are real gains because you can sell it (stocks, futures ...etc).
There are many funds out there that buy illiquid assets (think CDOs, private equities, pink sheets, small caps ..etc) and in the process they artificially jack up the price or assign an inflated market-to-model valuation to it and tell their customers they've made money and take a 20%+ performance fee from tne "gain".
This is fine as long as there are new customers coming in and not many customers taking money out. Once there are enough customers taking money out they will have to sell their assets and guess what it's not worth the artifically inflated price and no one would buy the asset at those price. The "gain" was never there.
Seriously it's not that much different from a ponzi scheme.
There are many funds out there that buy illiquid assets (think CDOs, private equities, pink sheets, small caps ..etc) and in the process they artificially jack up the price or assign an inflated market-to-model valuation to it and tell their customers they've made money and take a 20%+ performance fee from tne "gain".
This is fine as long as there are new customers coming in and not many customers taking money out. Once there are enough customers taking money out they will have to sell their assets and guess what it's not worth the artifically inflated price and no one would buy the asset at those price. The "gain" was never there.
Seriously it's not that much different from a ponzi scheme.
The most overvalued thing in the world is a financial journalist. He typically has no clue what he's talking about but writes authoritatively - and this guy is no different.
Not all hedge funds invest in illiquid assets. Those that do have some wiggle room in valuations but that's just the nature of illiquid assets and that's why there's such a thing as a LIQUIDITY PREMIUM to compensate for the additional risk. If unrealized gains are now classified as a Ponzi scheme, then all valuations of illiquid assets (including houses, cars and capital in a private entity) is a ponzi scheme. Despite his implication from the very beginning, regulation isn't going to cure that. Moreover, hedge funds are PLENTY regulated. I'm not a big fan of the business model, but I know enough about the draconian regulations hedge funds are subjected to by an incompetent SEC to know how regulated they are. Of course, as a journalist, this putz isn't expected to know any of that.
I may not like hedge funds but they are private investment partnerships. If you don't like them and you don't like illiquid assets, don't invest. Pretty simple, really.
Not all hedge funds invest in illiquid assets. Those that do have some wiggle room in valuations but that's just the nature of illiquid assets and that's why there's such a thing as a LIQUIDITY PREMIUM to compensate for the additional risk. If unrealized gains are now classified as a Ponzi scheme, then all valuations of illiquid assets (including houses, cars and capital in a private entity) is a ponzi scheme. Despite his implication from the very beginning, regulation isn't going to cure that. Moreover, hedge funds are PLENTY regulated. I'm not a big fan of the business model, but I know enough about the draconian regulations hedge funds are subjected to by an incompetent SEC to know how regulated they are. Of course, as a journalist, this putz isn't expected to know any of that.
I may not like hedge funds but they are private investment partnerships. If you don't like them and you don't like illiquid assets, don't invest. Pretty simple, really.
One more thing about realized/unrealized gains and liquidity....
If you have the 475 election with the IRS (which trading partnerships and hedge funds as well as individual traders trading for a living have to make), you are taxed on a mark to market basis. This means that you're taxed on UNREALIZED gains.
At least with Madoff you had a choice to let him run your money or not. The real outrage is the Ponzi scheme known as Social Security from which you cannot opt out. Taking money from current earners and giving it to current retirees is the very definition of a Ponzi scheme. Let's see if we can get some of these dumb journalists on the case.
If you have the 475 election with the IRS (which trading partnerships and hedge funds as well as individual traders trading for a living have to make), you are taxed on a mark to market basis. This means that you're taxed on UNREALIZED gains.
At least with Madoff you had a choice to let him run your money or not. The real outrage is the Ponzi scheme known as Social Security from which you cannot opt out. Taking money from current earners and giving it to current retirees is the very definition of a Ponzi scheme. Let's see if we can get some of these dumb journalists on the case.
Quote from Time:
The Ponzi Scheme in Every Hedge Fund
At the heart of the difference is the distinction between realized and unrealized gains. Gains are realized when assets are liquidated to cash. For instance, if you buy a stock for $100 and it is currently trading at $200, you have made $100 in unrealized gains. If you sell it at $200, you have made $100 in realized gains. Most hedge funds do not regularly liquidate their entire portfolio, so they report unrealized gains to their investors and to the public. (See the top 10 scandals of 2008.)
I agree with you 'trader3cnd' and I know Microsoft is not Ponzi butQuote from trader3cnd:
Market cap is not Ponzi scheme because if it goes down that is not deliberate to scam investors but it is only due to market action.
The whole article from Time is based on "unrealized gains".
Market capitalisation/value of Microsoft, Walmart & all giant companies display "unrealized gains"(as I have written earlier in this thread).
So what does this mean?