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Newton's In Search Of The Perfect Investment. Technology Investor. Previous Columns
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.

Mutual 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.

The 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.

AOL 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.

So 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 Australia’s large and growing current account deficit."

It's 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.

People like to be insulted:
Insult 1:
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..."

Insult 2:
"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.

Insult 3:
He said: "Since I first laid eyes on you, I have wanted to make love to you really badly."

She said: "Well, you succeeded."

Harry Newton

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, click here and here.
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