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The Secret Sauce in Hedge Funds. And Netflix, what now? Favorite headlines, tweets and “logic”

For years I’ve wondered about hedge funds. How come some do so well — so much better than I do?

The answer is in this headline:

The Cohen is Steve Cohen, who’s back in business managing other people’s money. Billions of it.

Looking at the story, I think to myself: you don’t have to that well if your returns are multiplied eight times. And when you show big returns, you can charge three and thirty — 3% a year to manage the money no matter how well you do and 30% of the profits. Which is what he’s presently charging.

How hard is it all? You could bat your head against a brick wall — like bring frustrated with Netflix’s miserable last night report — or you could simply buy an S&P Index fund and get results like this. From Vanguard:

I call Fidelity and say I want to borrow $1 million to juice up my returns. That will cost me 5.5% a year.

If I invest $1 million of my own money over ten years, I earn 14.7%.

Now if I borrow $1 million to buy a second million of the fund, I earn 14.7% on the first million and 9.2% on the second (free) million — for a total return of 23.9%.  That’s just for borrowing $1 million.

Let’s say I borrow $7 million. On each million I make 9.2%(for free) or 64.4% in total. Now add that to the 14.7% I’ve earned on my first million — my own money — and the total return is a whopping 79.1%.

If Cohen’s hedge fund did that, my returns as an investor would be reduced by his 3 and 30 fees. I’d still be happy.

Meantime, no hedge funds I know go for 8 to 1 leverage. The risks are enormous. Should the market turn down — as it did at the end of 2018 — you could be out of business in a nano-second. Banks aren’t very forgiving.

I’ve never used leverage to buy stock, since I’m a chicken.

But yesterday I met a new hedge fund who’s launching and planning two times leverage. That will juice their returns and maybe, their risk.

think of this differently. It could encourage them to take smaller risks and earn safe, steady bond-like returns, but still keep their investors happy with annual returns of 8% to 10% — after fees and after paying interest on their borrowings.

In the old halcyon days of S A C Capital Advisors, Steve Cohen’s time frame for holding/trading a stock was a reputed 21 days. His focus was trading. He is probably the world’s greatest stock trader. He had help. He paid huge commissions (he was reputedly the largest generator of commissions). In return insisted that he be the first person Wall  Street would call with news of their brokerage reports — buy or sell recommendations. That was when you could get information before anyone else — not only from analysts but from companies. In those days, there were many ways of getting an edge. You could even get an edge by reading the broad tape, and acting before others received it.

Then the Internet arrived. Teh SEC tightened its rules. And the world changed. Commissions are way down. There’s machine trading. Companies have to give everyone information simultaneously. Now the “strategy” is research, picking stocks you hope will succeed. That’s a much harder game. Tell me about it.

That’s the reason why private investors like me worship at the altar of diversification — from syndicated rental commercial and residential real estate, to index funds, from bonds to bank CDs to individual stocks (many).

Today I’ll get hit by my large holding in Netflix — it reported last night. But that “hit” won’t hurt me (except for my ego). There’ll be other stocks — like Apple, Amazon, Microsoft and Honeywell — that many times over will pay for today’s drop in Netflix.

Ah. Ah. You’re thinking, Harry you speak with forked tongue. It’s true all my syndicated real estate investments have leverage. Typically when we buy a property, we pay for it by 65% or so of borrowing. In the old halycon days borrowing was 75% or more and came with nasty covenants that could cause you to lose the property even though you were still up to date on payments to the bank. That’s also changed. We dropped the percentage borrowed and killed some of the more onerous covenants. Life changed in that arena also. Now, most syndications are safer. Rents are in line with incomes. And we’re tighter on who rents from us.

Netflix loses a few subscribers

From the New York Times:


CreditCreditEtienne Laurent/EPA, via Shutterstock

Netflix, the streaming juggernaut that has upended the entertainment industry, showed signs of vulnerability Wednesday when it reported that it had lost 126,000 paid subscribers in the United States during the second quarter. It was the first time the company had shed domestic streaming customers since it started its digital service 12 years ago.

The number of those subscribers dropped during a time when the price for Netflix went up. In January, the company announced that it was raising its rates by anywhere from 13 to 18 percent, depending on the subscription plan, with the increases hitting existing subscribers in March.

The second quarter is typically Netflix’s weakest time of year, but its performance this time was unusually poor. In its letter to shareholders on Wednesday, the company acknowledged that the higher subscription cost had something to do with its failure to meet second-quarter expectations.

For the full story, click here.

I’m not selling my Netflix stock. It will edge back.

Emails with my favorite investor

I emailed my friend, Ed, the brilliant investor:

I wish I could find something to buy. Nothing is cheap. All the recovery stocks have recovered…
What now?

He replied:

I agree. I haven’t bought anything since the end of May.

From The Washington Post

Plant Powered Week 5: What tofu can do for you

The weirdness of airline fares

On any plane there’s probably a tenfold difference in price in the same class — economy, premium economy, business, first and that doesn’t include the freeloaders.

Several readers emailed and said you need to negotiate with airlines and credit card companies to get twofers on business class, but there are still deals — in advance.

SeatGuru just got better.

Before you choose a seat, check SeatGuru for pros and cons of the seats the airlines won’t tell you. SeatGuru just got better, with brand-new seat maps to our SeatGuru collection. They cover over 100 airlines.

Don’t do stupid

If your doctor says do your  exercises or you’ll get pneumonia, do them.

Stubborness is not admirable quality. Especially in old people.

When the lights went out last week in Manhattan

This couple celebrated. I love the picture.

Favorite tweets

White People Love Dogs Because They Miss Owning Slaves

Survey Finds Most People Kiss Their Dog More Than Their Partner

Favorite stupid  quotes

Harry Newton, who notes bitcoin has dropped to under $10,000. Facebook should drop its Libra and buy Square. If they don’t, somebody else soon will. Square is on our list of stocks we like.