New Blog location

Hey there, couple of things:

A. Moving this blog over to Stockpickr.com. The new location will be:
http://stockpickr.com/problog/

B. Even if you don't check out my blog, please check out all the other content at stockpickr:
- spotlight portfolios
- today's lists (biggest winners/losers, lightning round, cheapest stocks, upcoming splits, etc) all presented in the stockpickr format
- Amazon-style recommendations based on the correlation between your portfolio and others.

Let me know if you have any feedback. Thanks.

Hedge Fund Fees Going to Zero

I hate to say it, but most hedge funds should be charging 50 basis points as a management fee and 0% as a performance fee right now. And most people who are invested in hedge funds should pull their money out. I don't mean to be a "player-hater". Heck, if you want to pay a 20% performance fee (and Lord knows I'm paying it in quite a few cases), then go right ahead. There are plenty of people lined up to take your money while doing no work for it. I'm being cruel but I'm not worried about hurting anyone's feelings. The hedge fund industry is a thriving juggernaut that could care less, as a whole, about this little column here. The industry has sucked all the manpower out of every other crevice and hole in Manhattan and many other cities as well. Although I feel a little sorry for all the junior analysts doing the reverse commute out to Greenwich just in time to watch the Great India Outsourcing of 2008 occur when everyone realizes that we might as well ship our research and quant needs out to the PhDs in Calcutta who will do it for $8.50/hr. And I know this because I do it. More on that in a later column.

But back to the topic here - why should fees be less? There's structural reasons and then there's practical reasons. The structural reasons include the fact that the S&P, the Dow Jones, and about a dozen other institutions, now have hedge fund indices to keep track of all the moves of their favorite arbitrage stragies. This "death by indexing" has resulted in a trillion dollars being flushed down the toilet at the hottest funds, only to watch returns now go to essentially zero, with T-bills returning 5%. The practical reasons are because most, if not all, hedge fund strategies can be simulated using publicly available ETFs or other techniques that avoid the fees the hedge fund managers charge.

Lets face it, my heroes are the cowboys who raised $50mm, $100mm, and then, miracle - $1bb back in the 70s, 80s, and early 90s. George Soros, Julian Robertson, Stevie Cohen, Michael Steinhardt. No pension fund manager would risk his job putting money with these guys. They were cowboys, riding roughshod over the English pound, shorting bonds with impunity in the 80s, tearing apart their weaker brethren in the back-to-back Asian default crisis of 97 and LTCM in 98. Knowing just when to dump their IPO allocations in the late 90s and when to hang up the hat, three-five billion in the bank, when the going wasn't as good. Actually, Cohen and Soros are still at it, but for them its a game at such an esoteric level, having so little to do with the basic needs of providing for food, shelter, and protection of family, that its no longer the same.

And that game is over. Hedge funds are institutions the same way your corner bank is where you deposit your paycheck and earn 1% interest in a money market fund. The anomalies and arbitrage situations these funds earned their keep on don't really exist anymore. Who are the outperforming hedge funds over the past few years? The guys specializing in microcaps, energy, and emerging markets, only because those markets have drastically outperformed the broader markets since 2003. There's zero way to tell if there's any real "alpha" thats been obtained by just about any of these funds during this period and the best way to tell is to look at all the funds that have dropped into the negative corner since May - since emerging markets and microcaps have flushed.

And whats the future? Convert arb can't go anywhere with spreads at zero. The only way they widen is if defaults go crazy and/or the Fed cuts rates and the results will be unpleasant along the way. Merger arb is directly correlated to a strategy of selling puts against the S&P 500. So save yourself the 2 and 20 and sell puts. Better yet, save your money and put it in T-bills because with volatility so low the
selling-puts (or merger arb) strategy has more risk than gain baked into it. Market neutral is like rolling the dice now, as previously correlated pairs just dance randomly arround each other while a trillion dollars worth of arb tries to figure out when the music's going to stop. I do like, however, the investments where the fund managers directly touch their investment - PIPES, Asset-backed lending, and Activism, since the manager is more involved in unlocking value and when he touches the investment he knows thats an edge that his 10,000 competitors don't have.

But for the rest. Its nothing more than traditional wealth management with a twist. The inside joke in the hedge fund industry is that most people don't get that. Going rate in wealth management is about 50 basis points, give or take expenses.

3 in the morning and my best work experience ever

Most people claim that their best work experience is when they left their jobs in corporate America and started a business. The blood, sweat, and tears of being an entrepeneur is painful, stressful, exhilirating, blah blah blah. Ever since I went on my own in my own business in the mid-90s I've had this tight clenched feeling in my stomach that went away briefly in late 1999 (more on that some other post) but has been mostly just a constant drag.

Certainly my best work experience was when I was still safely protected in the snug womb of my corporate mother, namely Home Box Office, otherwise known in my household, as The Greatest Company Ever. My wife worked there (I met her there), my sister works there, my older sister and brother-in-law were consultants, etc. I loved it.

My best work experience was there because they let me do this:

Here is the idea that I pitched them: basically, HBO, you guys are the kings of original programming on TV. So why not be the best at original programming on the web? They said, sure, what should we do? Well, how about I go around NYC at 3 on the morning on a Tuesday night and interview people, "Why are you out on a Tuesday morning at 3am?" There is ZERo reason to be out then unless you are up to something. Believe me, this is true. I did it for 3 years, from the end of 1995 to mid 1998. Every Tuesday or Wednesday, from 2am until about 5am, interviewing random people all over the city who happened to be out and about. Everything from Riker's Island jail to hookers in the meat packing district to homeless kids in the East Village and so on and so on. It was an enormous humbling experience for me and I hope sometime in my life I get to do something like that again.

Interview with Jim Cramer

I haven't really decided how I'm going to use this blog. I spend a lot of time writing my ideas on other forums like TheStreet.com and The Financial Times. However, every now and then I write something I'm really proud of and it doesn't fit into the regular stock-picking genre so I plan on posting those items here. Like, I'm really happy with the interview I did a few weeks ago with Jim Cramer.

Why am I here?

The other day my broker at [insert top 3 investment bank] called me to say Shanda Interactive was getting bought by Softbank for $25 a share. "Its definite, man." A week later Shanda had a 30% drop in revenues and the stock fell almost 20%, down to $13 and change. Yesterday, different broker/different bank, tells me Nvidia had a huge chip malfunction with one of their shipments to Edom, their biggest distributor. My question is, "why do I know this?" Why, in all the people in the universe, am I getting the call about this privileged information. A truck loses a wheel on a dirt road in China, a bunch of chips fall to the ground, busted, and are now worthless. 12,000 miles away, James Altucher gets the call 15 minutes later – "short this little baby!" In Tokyo, Masayoshi Son lets it slip to his shoeshine boy that he likes playing "Legend of Mir II" in his spare time and might buy the Chinese company that makes it. Who gets the call 4 minutes later? Me.

And I'm not just talking about stock tips. We all know stock tips are mostly useless. But this feeling of "why am I here" applies to other situations. A few months ago I get a call about "a great deal". Every deal has its story so I listen. "Major internet company from the 90s. Auction site. Went private, then got bought, then got bought again. Now its going public in a reverse merger. Revenues kicking *ss. We're doing a $75mm raise so it can go public in a reverse merger. Goldman Sachs investing in the deal. We have $65mm hard-circled. Can you help us find the final $10mm?"

In other words, this great internet company, which went public in the 90s, soared to $300 a share before getting bought at $2, is going to destroy EBAY, has Goldman Sachs as an investor and 10 other 'big names' and, I forget to mention, "the guy that sold XYZ Company to [big media company] for $500mm is going to be the CEO." Now all they need to conquer the world is…me. Or what about the company that has a new vodka sponsored by [insert popular reality TV star here] and has deals with every major alcohol distributor in the world and now needs helping finding the final $500k to close a major deal. Every investment banker super pumped about the deal now hanging out at the water cooler thinking of the only person in the world who can handle this major challenge. Me, sitting in my pajamas, watching soap operas at 10am in the morning with my three year old daughter. Of course!

The reality is, those two deals can't get done. And if they get done [actually, one of them did – they closed at $65mm instead of the hoped-for $75mm] – they are going to go bankrupt. Nobody is out to give me money for free. Nobody cares about me at all. Nobody wants to do me any favors. And nobody needs my help unless in the privacy of their office urinals they are staring at the ceramic wall, thinking, "damn, how the hell am I going to get this one done?" Once in a blue moon, a miracle happens, and someone who for some reason doesn't know better, accidentally makes the call to me, and money results. So consequently I have to take every call, listen to every story, and ask the "am I smoking crack?" question again and again when it comes to wondering why someone wants to give me free money.

Like the guy who is being forced at gunpoint to allocate $15bb for "a major consortium of pension funds." He calls me, "can you handle a $500mm allocation to your fund?" No. "Well, what about if we give you $25mm a month, like clockwork?" So now I ask: "am I smoking crack?" Is this a crack-induced mirage on the bleak desert that represents "love and good wishes in the financial world."?

So I have to take the call. And I have to follow up. And send financial reports, network, make calls, attend meetings. And then followup to those meetings: "It was great meeting you. Lets work on those next steps." And hence a day, week, month of schedules fill up and my three year old has to watch Spanish soap operas all by herself, "but it will all be worth it". And sometimes I forget to return a call and then I have to wonder – was that The One? The One, which the Prophets spoke of on the Day of my Birth? The call that was going to fulfill my descendants' dream of financial security so they can focus on making the world a better place?

Oh, Lord, I hope so, but thank You that at least I can use the material for a blog post.