Harry Newton's In Search of The Perfect Investment
9:00 AM EST, Wednesday, August 27, 2008: Sorry
about the mess yesterday. I finally got it right when I cut some of the software
code in the TV tennis table. Web software is not easy.
is picking stocks today. Item: One day Freddie and Fannie are so sick, they
need the Feds to keep them alive. Their stocks plummet. The next day, they are
profits and their stocks fly. Go figure.
the FDIC's head, Sheila Bair, warned
on Tuesday that the outlook for the ailing banking industry was bad and
getting worse. Said today's New York Times:
For the full story,
go to the New
tide of toxic home loans is proving to be even more worrisome than initially
feared, Ms. Bair said. She is struggling to clean up the mess and forestall
home foreclosures with a plan to ease loan terms for hard-pressed homeowners.
going to be slog to work though this, but there is no easy way to do it,
Ms. Bair said about her plan during an interview in her office here. We
havent seen the trough of the credit cycle yet.
outlook was underscored on Tuesday by the F.D.I.Cs latest quarterly
assessment of the industry. The agency said the number of bad loans at banks
ballooned to its highest level in 15 years during the second quarter.
bank earnings plunged 86 percent from April to June, to $4.96 billion, from
$36.8 billion a year earlier, the agency said.
which guarantees savings and checking deposits, also raised the number of
banks on its list of problem lenders to 117, the most since mid-2003.
That is up from
90 at the end of the first quarter. The agency does not disclose which banks
are on the list, but it said the troubled lenders had combined assets of about
There are three
1. Don't leave
more than $95,000 in any one bank.
2. When in doubt,
stay out." Repeat again, When in doubt, stay out.
3. The market
can stay irrational longer than you can stay solvent.
are too difficult. How difficult? Read this piece from The New York Times' Dealbook:
Hedge Fund Is Harder Than It Looks on TV
By ANDREW ROSS SORKIN
Do you remember
a time, only a short while ago, when virtually anybody could start a hedge
fund? It seemed so easy: billions of dollars were being thrown around like
confetti, even at first-time managers. You could make money with your eyes
closed. Or so it seemed.
Ronald G. Insana
was one of the people who chased that dream. Yes, that Mr. Insana the
man who spent more than a decade as one of CNBCs most prominent anchormen,
interviewing some of the biggest titans in business and trying to make sense
of the daily gyrations of the market.
In March 2006,
Mr. Insana left the network to try his hand at becoming one of those titans,
setting up a fund to help investors get into hedge funds, a so-called fund
of funds. Paul Kedrosky, the writer and investor, said at the time that Mr.
Insanas announcement reminded him a little of Lou Dobbs going
to Space.com at the peak of the dot-com bubble. Mr. Dobbss adventure,
you may recall, didnt turn out well; hes back on TV.
Two weeks ago,
Mr. Insana announced that he was throwing in the towel. Though his career
detour doesnt rank on the flameout scale anywhere approaching the Space.com
debacle, it is an unusually instructive and cautionary tale.
One of the big
raps against hedge fund managers is that their fee structure is so rigged
that managers can get rich even if they never make a penny for investors.
Eric Mindich, the former Goldman Sachs whiz kid, left the firm in 2004 to
start Eton Park Capital Management and immediately raised more than $3 billion.
His firm charged a 2 percent management fee and 20 percent of the profits
with a three-year lock-up handing him a $60 million paycheck before
he even opened the door.
But most hedge
fund managers arent like Eric Mindich. They dont start off with
$3 billion and they dont put out their shingle with a guarantee of riches.
Instead, theyre like, well, Ron Insana.
If there was
one thing Mr. Insana had built up over the course of his career in journalism,
it was great contacts. He knew everybody in the hedge fund business, which
is why, when he started Insana Capital Partners, he chose to create a fund
In his role
as manager of Insana Capital Partners, he would act as a kind of hedge fund
middleman, directing money to various hedge funds. The fund itself was grandiosely
called Legends, which, while perhaps pretentious, made sense given the funds
he could access. His clients would be invested in SAC Capital, managed by
Steven A. Cohen; Icahn Partners, managed by Carl C. Icahn; or the Renaissance
Technologies Corporation, run by James H. Simons, perhaps the most successful
hedge fund manager on the planet. These funds are typically closed to the
for getting his investors behind the velvet rope, he charged a 1.5 percent
management fee and took 20 percent of all profits. That may not sound like
a bad deal but consider that those fees come on top of the fees charged
by the hedge funds themselves. (In the case of Mr. Simons, in particular,
the fees are astronomical: a 5 percent management fee and more than 40 percent
of the profits.)
Over the course
of more than a year, Mr. Insana raised about $116 million. It was a respectable
number, to be sure, but it wasnt $3 billion. And here is where Mr. Insana
ran into trouble.
As an investor,
Mr. Insana didnt exactly have the wind at his back. During the 14 months
his fund of funds was up and running, the Standard & Poors 500-stock
index fell more than 15 percent. While some hedge funds managed to eke out
gains, many did not. Ultimately, Mr. Insanas fund lost 5 percent.
In the mutual
fund business, beating the S.& P. would be more than enough to survive,
and even prosper. Mr. Insana would have been a hero. But the hedge fund business
is far more cut-throat. For a small fund like Mr. Insanas, it is imperative
to make money regardless of whether the S.& P. is up or down and
because he didnt, the 20 percent portion of his fee structure was worth
That left his
management fee, which amounted to $1.74 million. (Thats 1.5 percent
of $116 million.) On paper, that may seem like a lot of money. But its
not. Like many first-time fund managers, Mr. Insana was forced to give up
about half of the general partnership to his first investor in this
case, Deutsche Bank in exchange for backing him. After paying Deutsche
Bank, Insana Capital Partners was left with only about $870,000.
That would have
been enough if it was just Mr. Insana, a secretary and a dog. But Mr. Insana
was hoping to attract more than $1 billion from investors. And most big institutions
wont even consider investing in a fund that doesnt have a proper
infrastructure: a compliance officer, an accountant, analysts and so on. Mr.
Insana had seven employees, and was paying for office space in the former
CNBC studios in Fort Lee, N.J., and Bloomberg terminals at more than
$1,500 a pop a month while traveling the globe in search of investors.
Under the circumstances, $870,000 just wasnt going to last very long.
hedge funds have something called a high water mark. It requires hedge fund
managers to make investors whole before they can start collecting their 20
percent of the profits regardless of how long that takes. Hedge fund
managers dont get to start from scratch every Jan. 1 the way their mutual
fund brethren do.
In the end,
the rock was simply too heavy for Mr. Insana to keep pushing uphill. On Aug.
8, he sent a letter to investors explaining why he was closing shop. Our
current level of assets under management, coupled with the extraordinarily
difficult capital-raising environment, make it imprudent for Insana Capital
Partners to continue business operations, he wrote. He said he planned
to take a job with his pal Mr. Cohen at SAC. Mr. Insana declined to comment
for this column.
In truth, there
are thousands of Mr. Insanas desperately trying to raise money from nondescript
little offices across the country. Some of them raised $10 million, some raised
$100 million or more. And, as money has gotten tighter, and the bloom has
come off the hedge fund rose, some have raised none at all.
Such was the
case of Dow Kim, the co-president of global markets and investment banking
at Merrill Lynch, who left the firm in May of last year to strike out on his
own. With expectations of raising several billion dollars, he hired more than
30 people. Last week, he shuttered the business before he had even begun.
In the coming months, Wall Street is going to be littered with such flameouts.
big boys get most of the ink, Mr. Insanas is a far more common story
and far more representative of what is happening in the land of hedge
Mr. Insana probably
should have seen it coming. In 2002, he wrote a book called, Trendwatching:
Dont be Fooled by the Next Investment Fad, Mania, or Bubble. Oops.
B.S. Wall Street pumps out. Merrill Lynch is paying
a $125 million fine and buying back between $10 billion and $12 billion of auction
rate securities it lied to its customers about. It said that the securities
were cash equivalents. Does that bother me? Not as much as the advertisement
I heard yesterday from Merrill. It stressed what you got from Merrill -- "strength,
commitment and leadership." I thought about all those Merill customers
stuck in frozen securities they couldn't sell. Many had emailed me painful stories
about how they'd been lied to by their Merrill broker... The ad made me want
is bike friendly. It's flat. It's small. And gas is pricey. My dream
European vacation is to take my Dahon folding bike to Europe. I'd explore one
European city, then jump the train with my folding bike to the next city. If
you take a big bike, you have to check it and pay money. But folding bikes travel
free. You see a lot of them on Belgium trains.
The big Belgium cities rent bikes at the train station. This is Michael with
a rented bike in Antwerp. Note the small groove on the side of the stairs. That's
for rolling your bike downstairs in the station.
find an enormous parking garage for bicycles. Parking is free. In one corner
is the place you rent bikes -- around 13 euros a day.
As a reward for
all your exercise biking, you can visit one of the sidewalk shops selling Belgium
record on Lyme Disease: I'm watching the U.S. Open. The announcer
talks about a player called Samantha Stosur. The announcer says Sam had "an
illness that cost her much of last year. She had Lyme Disease. It made it difficult
many days to get off the couch." This weekend is long. Please stay away
from tall grass.
tries to scam a ticket: It's the late August
game. This is yesterday's email exchange. I don't make this stuff up.
Any plans to attend the US open?
Yes. You got any tickets?
Unfortunately I don't, but let me know if you have a particular match and I
But you don't have any tickets to any matches? Correct?
No I do not.