Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Wednesday, May 11, 2005: Some
big hedge funds are in big trouble, according to rumors. Seeing this year's lousy
performance (see yesterday's column), investors are taking their money out of
hedge funds. Jim Cramer calls them "stupid, rich guys." When hedge fund
investors take their funds out, the hedge funds have to sell their holdings. These
sales have been the cause of much of the recent market weakness. I'm
guessing people will continue taking their monies out well into July. Most
hedge funds insist on lengthy and timed notice to get your money back.
It's been hard for hedge funds -- in fact, for anyone -- to make money in recent
weeks. Markets have been volatile. Some examples:
How does Yale do it? Yale University earned
19.1% on its endowment in 2004, bringing its 10-year return to 16.8%
a year, net of fees. This placed it in the top 1% of institutional investors.
An amazing performance. To quote a recent report Yale sent to its alumni,
is structured using a combination of academic theory and informed market judgment.
The theoretical framework relies on mean variance analysis, an approach developed
by Nobel laureates James Tobin and Harry Markowitz. ... Using statistical
techniques to combine expected returns, variances, and covariances of investment
assets, Yale employs mean-variance analysis to estimate expected risk and
return profiles of the results to changes in input assumptions. ...
Over the past
two decades, Yale has reduced dramatically the Endowment's dependence on domestic
marketable securities by reallocating assets to nontraditional asset classes.
In 1984, more than three-quarters of the Endowment was committed to U.S. stocks,
bonds and cash. Today target allocations call for 22.5% in domestic marketable
securities, while the diversifying assets of foreign equity, private equity,
absolute return strategies and real assets dominate the Endowment, representing
77.5% of the target portfolio.
of quantitative analysis and market judgment employed by Yale produces the
* Absolute return
investments "seek to generate high long-term real returns by exploiting
market inefficiencies. Approximately half of the portfolio is dedicated to event-driven
strategies, which rely on a very specific corporate event, such as a merger,
spin-off or bankruptcy restructuring, to achieve a target price. The other half
of the portfolio contains value-driven strategies, which involve hedged positions
in assets or securities that diverge from underlying economic value. ... Unlike
traditional marketable securities, absolute return investments provide returns
largely independent of overall market moves. Over the past ten years, the portfolio
exceeded expectations, returning 12.2% per cent per year with essentially no
correlation to domestic stock and bond markets.
attribute of Yale's investment strategy concerns the alignment of interests
between investors and investment managers. To that end, absolute return accounts
are structured with performance-related incentive fees, hurdle rates and clawback
provisions. In addition, managers invest a significant portion of their net
worth alongside Yale, enabling the University to avoid many of the pitfalls
of the principal-agent relationship."
** Yale defines
real assets as real estate, oil and gas, and timberland. Yale says these "share
common characteristics: sensitivity to inflationary forces, high and visible
current cash flow and opportunity to exploit inefficiencies."
your hedge fund manager suddenly drives a new Porsche, here's why:
The New York University whiz kid charged in a $43 million bank fraud posed as
Turkish royalty and charmed his way into Greenwich, Conn.'s high-stakes investing
world, only to leave behind victims including an "Ali" movie
producer, according to court documents and interviews.
His hair a mess
and his shirt untucked, Hakan Yalincak, 21, last year told producer Paul Ardaji
that he was starting a hedge fund. He boasted financial statements showing a
family worth of $800 million and a supposed credit line of $100 million.
Yalincak and his
mother wanted to rent office space from him, Ardaji recalled. "They said
they were Turkish royalty, the equivalent of the Rockefellers in Turkey,"
said Ardaji, whose 2001 film "Ali' starred Will Smith. "He had me
sold. I thought this kid was going to own the world someday."
But court records
show that Yalincak was just a smart kid with a $95,000 credit-card bill and
a family with a history of fraud, lawsuits from irate creditors and a house
that was foreclosed on because of massive debt.
Still, Hakan Yalincak
and his mother set up their Greenwich office last year under the name Yasam
Trading, furnishing it with mahogany desks and plush, silk-upholstered chairs.
They ordered thousands of dollars in computer equipment, hired temporary workers
to monitor the Bloomberg stock tickers and shuttled investors in and out of
the conference room.
trying to make inroads with everybody," Ardaji said. "They set it
all up, they had their meetings that same day and the next day, and the temps
never showed up again. And neither did the Yalincaks."
were never even online, he said. They were just a prop. And the $100 million
credit line never materialized, according to documents turned over to the FBI,
because Greenwich bankers discovered the application documents were fraudulent.
attracted at least $2.8 million from two respected investors who later sued,
saying they couldn't get their money. Court documents claim that at least some
of the money was used to buy Tiffany jewelry and a Porsche.
a 21-year-old mathematics major, will be unable to attend his college graduation
this Wednesday as he sits in jail awaiting trial.
I pierced the
story above together from a number of sources, including the New York Post.
junk bond status:
Executives at Ford and General Motors today challenged a move by
Standard & Poor's to downgrade the big automakers' debt to 'junk' status.
In a teleconference
with institutional investors, they made a vigorous pitch for buying what they
called "quality-checked" or "certified pre-owned" bonds.
has such a negative sound," said an unnamed GM spokesman. "A man can't
come home to his wife and say 'Honey, I bought some junk bonds today.' We need
to give our non-investment-grade debt a name that conveys prestige, style, success
and hope for a better tomorrow."
suggested that investors think of GM and Ford debt as 'creampuff bonds' or 'genuine
can you get for a bottle of wine?
Sally was driving home from one of her business trips in Northern
Arizona when she saw an elderly Navajo woman walking on the side of the road.
As the trip was long and quiet, she stopped the car and asked the Navajo woman
if she would like a ride?
With a silent
nod of thanks, the woman got into the car. Resuming the journey, Sally tried
in vain to make a bit of small talk with the Navajo woman. The old woman just
sat silently, looking intently at everything she saw, studying every little
detail, until she noticed a brown bag on the seat next to Sally.
the bag?" asked the old woman.
Sally looked down
at the brown bag and said, "It's a bottle of wine. I got it for my husband."
The Navajo woman
was silent for another moment or two. Then speaking with the quiet wisdom of
an elder, she said, "Good trade."
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 .
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