When Markets Collide

I don’t really like responding to comments in the comment section because I feel like no one reads them. I am going to start including reader questions with answers at the end of some posts. At the end of this post is one related to my last rant on the hedge fund space.


I just signed up, and at $1/day, a subscription to Bespoke Premium is a steal.


I was at the NAAIM conference earlier this week, and I heard a great analogy this week about drawdowns and time frames. Greg Morris said that investing in stocks for the long run is nice – if you’re a Sequoia Tree or a Giant Tortoise (or an endowment).

Recovering from a -30% loss (at 10% returns) requires about 4 years to get back to even, a -40% loss 6 years, and a -80% loss an insurmountable 20 years. . .


Quote of the day, “All progress is based upon a universal, innate desire on the part of every organism to live beyond its income.” – Samuel Butler


PIMCO manager/Harvard endowment/PIMCO manager El-Erian has some new Summer reading for you – When Markets Collide: Investment Strategies for the Age of Global Economic Change


Popular Mechanics puts the Aptera in the lead spot to win the X-prize. With oil hitting new highs, I really should have put down the deposit for one of these instead of that SUV.


My response to comments are below:

Hedge funds are over rated.

I don’t want it to seem that I am a cheerleader for hedge funds across the board because there are plenty of crappy ones. However, I don’t see why they should be limited to rich people. I like the option to invest in hedge funds. As I mentioned in another post, “hedge fund” is just a legal structure (and typically a fee structure).

So why don’t you start a service that provides knowledge of and access to these foreign alternatives to the small American investor. Isn’t that doable? Just a service that covers the 50 or so listed FOFs in London, along with education as to how to integrate them with a multi-asset conventional portfolio ( a la Yale endowment, etc, which you write so much about) would be huge.

You would not only be a hero, but considering that the hedge fund industry is over $2 trillion, and the little guy here still has no viable access, you might stand to make a pile as well.

I would absolutely love to. For an example, about 10 of the 40 odd FOFs listed abroad had investments in the Paulson funds (which were up 200-500+% in 07). However, a US investor really can’t invest in them due to PFIC rules and their tax implications (namely you get hammered at current income taxes and have to mark to market the positions). I am convinced that Powershares is either unaware of these implications for their PFP fund, or are not admitting to it. They haven’t surfaced because the fund has gone straight down, but when it goes up I imagine the holders will get a very nasty surprise with their tax distributions. I hope I am wrong.

As far as I can tell, the individual funds should be OK for tax deferred accounts (IRA, etc).

To try and get around the taxable problem I have been chatting with the index providers about developing an index on the foreign listed funds – I’ve owned the domain listedhedgefunds.com for some time but have just been waiting for someone else to do it. I think with some clever financial engineering and maybe some swaps you could get around the tax problems. Stay tuned.

As an aside I was reading an article in Futures magazine last night written by Daniel Collins. It detailed the difficulty in developing alternative funds for the retail market. He used the Frontier Funds as an example, whose prospectus is 535 pages long. So onerous are the listing requirements that the CIO estimates the breakeven cost on most of their products at 2.25%. The cost structure ends up being around 4% and 20%, which is higher than Winton’s 1% and 20%, but the minimum goes from $1M to $1,000. (The article also mentioned Peregrine Financial’s CTA seeding program.)

[PS – I liked the comment posted for an educational requirement to invest in alternatives (or really any listed product) instead of the accredited rule. Why not have a dimple DMV driving test style test use could take online to invest in them? I know a lot of uninformed rich people as well as many brilliant and versed non-accredited individuals.]