Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Wednesday, March 9, 2005: The
essence of the deal: You will never get rich giving your money to a hedge fund.
You will get rich owning a hedge fund. Here's how it works. A hedge fund
charges its investors two fees. First is a percent of assets -- typically two
to 2.5 percent. This fee is used to pay the fund's day-to-day expenses and the
salaries of its management. Second, is a percent of the gains -- typically 20%.
These monies are paid to the owners of the fund, which may include the management
and may include some of the privileged investor/owners in the fund. If the fund
does well, these investor/owners will benefit in two ways -- by the rise in value
of their own investment and the rise in value of everyone else's investment. It's
the ultimate leverage.
Not every investor in a hedge fund can own part of a hedge fund. That privilege
is typically restricted to investors kicking in large, early monies and gambling
that the new fund will succeed. But that decision may be a "no-brainer"
if you have bright young kids looking to get out on their own and you throw in
some negative covenants -- like a having a veto over salary increases and getting
your money out quickly if things turn sour.
The point of all
this is not that you or I should seek to own part of a hedge fund --
but that there are always wrinkles within wrinkles. And the inside wrinkles
are typically more profitable. The key is to look, ask ("how does this
work?"), check and end up owning. Getting rich is a function of ownership,
not of being a client.
funds drop their fees: I'm not a fan of mutual funds, because of
high fees and recent lousy performance. The funds that tend to be safest tend
to be index ones. Fortunately, they're the cheapest ones. Last week, for example,
Fidelity Investments permanently reduced the annual expenses on five of its
index funds to 0.1% of assets. I'm not recommending Fidelity, purely
giving them as an example. The Wall Street Journal has a piece on mutual
fund expense today. It asks "Why this sudden fuss over costs?"
And it answers itself "Fund expenses have always wreaked havoc with
investors' returns." All the studies I've ever seen show you don't
get better performance by paying more money. The Journal writes, "Among
bond-fund managers, nobody is more highly regarded than Pimco Total Return Fund's
Bill Gross. But you probably have a higher opinion of Mr. Gross if you own the
fund's D shares, with their 0.75% annual expenses, than if you own the
C shares, which levy 1.65%. The D shares have outpaced the Lehman Brothers
Aggregate Bond Index over one, three and five years and receive a coveted five-star
rating from Morningstar Inc. The C shares, meanwhile, have trailed the Lehman
index over the three time periods and earn just three stars."
In short, fees are key.
airlines' pillow wars: Does management have a Vision? Does their
Vision make sense? Take the airline industry. (Please do.) Delta is eliminating
pillows in mid-March. American and Northwest already have. The
airlines say many passengers are bringing their own pillows! Which I don't believe.
In contrast, JetBlue provides pillows, charges little and consistently
fills its planes. Will Delta, American or Northwest make it? If
pillows are what management thinks of, I wouldn't bet on it.
is starting Internet phone service. That's their best idea in eons.
I use BroadVoice's Internet phone service, which works fine -- except
for occasional drop-offs. (See button on left.) Yes, it's true, Internet phone
service is not 100% ready for prime time. But the price is right -- $20
for unlimited calling in North America and most parts of the world you'd want
to call. AOL says its new Internet phone service would be its "ease
of use." I love that bit of marketing hype. Heck what could be easier
than dialing ten digits on a $10 phone? AOL's service will run on Level 3's
backbone and use softswitches by Sonus Networks. I wouldn't buy either
company on the basis of the AOL deal.
much for my idea of investing in commodity-rich Australia: My friendly
down-under economist writes "a significant depreciation of the A$ -
something which we think is increasingly possible after around mid-year as US
interest rates continue to rise, eroding the spread between Australia and US
(and other) rates which has to date made relatively effortless the financing
of Australias large and growing current account deficit."
a good time to be in cash: I don't have any brilliant
recommendations for you today, except to stay in cash and have a little in Whole
Foods (WFMI) -- see yesterday's column. There will be many opportunities
in coming months. The economy is doing OK. The stockmarket is blah. Having cash
will allow us to take advantage of them.
like to be insulted:
A couple is lying in bed. The man says, "I
am going to make you the happiest woman in the world"
The woman says,
"I'll miss you..."
"It's just too hot to wear clothes today," Jack says as
he stepped out of the shower, "honey, what do you think the neighbors would
think if I mowed the lawn like this -- naked?"
"That I married
you for your money," she replied.
He said: "Since I first laid eyes on you, I have wanted to make love to
you really badly."
She said: "Well,
This column is about my personal search for the perfect investment. I don't
give investment advice. For that you have to be registered with regulatory authorities,
which I am not. I am a reporter and an investor. I make my daily column -- Monday
through Friday -- freely available for three reasons: Writing is good for sorting
things out in my brain. Second, the column is research for a book I'm writing
called "In Search of the Perfect Investment." Third, I encourage
my readers to send me their ideas, concerns and experiences. That way we can
all learn together. My email address is .
You can't click on my email address. You have to re-type it . This protects
me from software scanning the Internet for email addresses to spam. I have no
role in choosing the Google ads. Thus I cannot endorse any, though some look
mighty interesting. If you click on a link, Google may send me money. That money
will help pay Claire's law school tuition. Read more about Google AdSense,
here and here.