30% ROI per year is fantastic in the world of hedge funds, but it is chicken scratch. Zerohedge tells us how to get a 77,500% ROI:

The dream of virtually anyone who has ever traded even one share of stock has always been to generate above market returns, also known as alpha, preferably in a long-term horizon. Why? Because those who manage to return 30%, 20% even 10% above the S&P over the long run, become, all else equal (expert networks and collocated flow-frontrunning HFT boxes aside), legendary investors in the eyes of the general public, which brings the ancillary benefits of fame and fortune (usually in the form of 2 and 20). This is the ultimate goal of everyone who works on Wall Street. Yet, ironically, what most don’t realize, is that these returns, or Returns On Investment (ROI), are absolutely meaningless when put side by side next to something few think about when considering investment returns.

Namely lobbying.

Because it is the ROIs for various forms of lobbying the put the compounded long-term returns of the market to absolute shame. As the following infographic demonstrates, ROIs on various lobbying efforts range from a whopping 5,900% (oil subsidies) to a gargantuan 77,500% (pharmaceuticals).

How are these mingboggling returns possible? Simple – because they appeal to the weakest link: the most corrupt, bribable, and infinitely greedy unit of modern society known as ‘the politician‘.

I guess I’m in the wrong business.

Are hedge funds going soft? Minyanville seems to think so:

It’s time to call the hedge fund industry what it has become — a bunch of scaredy cats trying to hold onto “2 and 20” paying assets. Let me explain…

Here’s how it works. Essentially, hedge funds begin every month short an equity index call option a few percent out of the money. If markets don’t move a lot directionally they presumably have enough skill to grind out a little performance. If markets rally significantly, however, they have to chase the upturn so that they don’t fall too far behind their benchmarks.
Right now, a hedge fund manager’s best friend is a 5% selloff during the first week of the month. Why? All of a sudden it’s easy to look good. Any performance number for the month suddenly looks reasonable; even better, if we get one of those fluke 2-3% rally days there’s no pressure to chase it because the market will still be down a couple percent on the month. This peaceful state of mind lasts until the end of the month, at which point it’s time to stress about a big rally in the following month.

Read more: http://www.minyanville.com/business-news/markets/articles/risk-assets-2-and-20-hedge/5/25/2012/id/41254#ixzz1vwiEKbm6

According to Zillow the average homeowner is $75K underwater:

According to the first quarter Zillow Negative Equity Report, 31.4 percent of U.S. homeowners with a mortgage are underwater (see figure 1). This is nearly flat on a quarterly basis, up only 0.3 percent, but down 1 percent since the first quarter of 2011. On average, U.S. homeowners owe $75,644 more than what their house is worth, or 44.5 percent more (see table 1). Almost 5 percent of homeowners with a mortgage in the nation owe more than twice what their house is worth (see figure 2). While a third of homeowners with mortgages is underwater, 90 percent of underwater homeowners are current on their mortgage and continue to make payments.

So based on this info, do you think hedge fund managers will short housing or mortgage lenders or bet on hyper inflation to help mitigate the suffering?

Ray Dalio’s hedge fund management company, Bridgewater Associates runs more than $120 billion. This is what he had to say in a recent interview with Barron’s.

The U.S. is experiencing a “beautiful delevering”:

A beautiful deleveraging balances the three options. In other words, there is a certain amount of austerity, there is a certain amount of debt restructuring, and there is a certain amount of printing of money. When done in the right mix, it isn’t dramatic. It doesn’t produce too much deflation or too much depression. There is slow growth, but it is positive slow growth. At the same time, ratios of debt-to-incomes go down. That’s a beautiful deleveraging.

What is going on in Europe:

We were very close to a debt collapse in Europe, and then the European Central Bank began the LTROs [long-term refinancing operations]. The ECB said it would lend euro-zone banks as much money as they wanted at a 1% interest rate for three years. The banks then could buy government bonds with significantly higher yields, which would also produce a lot more demand for those assets and ease the pressure in countries like Spain and Italy. Essentially, the ECB and the individual banks took on a whole lot of credit exposure. The banks have something like 20 trillion euros ($25.38 trillion) worth of assets and less than one trillion euros of capital. They are very leveraged.

What to expect in the markets:

At the moment, there is a tipping toward slowing growth and a question of whether there will be a negative European shock, and that will favor low-risk assets. But to whatever extent we have negative conditions, central banks will respond by printing more money. There will be a big spurt of printing of money, and that will cause a rally and an improvement in the stock markets around the world. It’s like a shot of adrenaline: The heart starts pumping again and then it fades. Then there is another shot of adrenaline.

Everybody is asking, “Are we going to have a bull market or a bear market?” I expect we will have both with no big trend. Typically, in these up and down cycles, the upswing will last about twice as long as a down swing. We are now in the higher range of the up-cycle.

Chesapeake Energy is the company that everybody loves to hate. Short sellers have driven its stock price from a high of $35 to a recent low of $14 on the belief that natural gas prices are going to zero and going to take the debt heavy company and its CEO down with them. But ZeroHedge begs to differ. It says that zirp allows companies like Chesapeake to roll their debt and burn the short sellers (fundamentals be damned):

We said this a month ago when we cautioned, precisely about Chesapeake, that “to all those scrambling to short the company: beware. CHK has a history of being able to fund itself with HY bonds and other unsecured debt come hell or high water. If and when the stock tanks, the short interest will surge on expectations of a funding shortfall. Alas, courtesy of the Fed’s malevolent capital misallocation enabling, we are more than confident that the firm will be able to issue as much HY debt (unsustainably at 10%+, but that is irrelevant for the short-term) as it needs, crushing all short theses. What this means, simply, is that anyone who believes traditional fundamental analysis will and should work in the CHK case is likely to get burned.” Sure enough, we were again proven right: Chesapeake just announced, following today’s epic drubbing, that it is refinancing its secured debt facility (with its numerous restrictive covenants) with $3 billion in brand new Libor+7.00% unsecured paper (courtesy of Goldman and Jefferies). In doing so, CHK just got at least a one year reprieve.

Man Group is the biggest publicly traded hedge fund in the world and recently it has been getting smashed. According to Forbes:

Man Group, the world’s biggest publicly-traded hedge fund firm, had a terrible week that got even worse on Friday as its shares fell another 4% and hit a 52-week low. It has been a humbling decline for the once mighty Man, which has now seen its stock fall by 60% in the last year. The stock fell every day this week.

What’s worse is that its main fund is down while the market is up. Talk about adding insult to injury. As its market cap falls, there is a risk that Man may get kicked out of the FTSE100:

With $59 billion of assets, Man Group is now facing the uncomfortable fact that it could be kicked out of the FTSE 100 index in June, which would lead index funds to dump the stock. The traders at AHL, which pursue a managed futures strategy, will have to turn performance around quick. They are already 14% below their high water mark.

I wonder if the firm’s traders are already placing wagers on this scenario.

It’s tough being a hedge fund manager. John Arnold decided to shutdown his bloomberg terminal at the ripe old age of 38. The former Enron trader and owner of Centaurus Advisors has returned investor money and decided to retire with $3.5 billion in the bank. It’s a tough life indeed. According to HuffPo:

That’s the true story of former star Enron trader John Arnold, who most recently worked as a hedge fund manager. He’s decided to shut down his firm Centaurus Advisors and return investor money, retiring at the ripe old age of 38, according to The New York Times. Arnold rose to prominence at now disgraced Enron for his natural gas trading prowess. After avoiding accusations of wrongdoing during the firm’s accounting scandal, Arnold went on to net triple digit returns with Centaurus Advisors, which he started in 2002. Now worth an estimated $3.5 billion, he’s one of wealthiest hedge fund managers in the U.S., according to Forbes (h/t The Daily Mail).

The article goes on to say that Arnold has retired to pursue other interests. My only hope is that those other interests don’t entail taking over the world and a pool of sharks with lasers mounted on their heads.

At least Arnold’s retirement lifestyle will probably be much more fun than that of his former Enron colleagues. The article goes on to say:

Arnold will join a number of former Enron colleagues who are no longer working, albeit for very different reasons. Former CEO Jeffrey Skilling will continue to serve a 24-year federal prison sentence after losing an appeal last month on charges of conspiracy to commit securities fraud. Andrew Fastow, Rex Shelby and Richard Causey, all other Enron executives, have all spent time at a Houston halfway house, finishing out sentences of various lengths related to the scandal.

ZeroHedge has just posted Hugh Hendry’s latest letter. Here are some of Hendry’s most compelling insights.

Hendry hasn’t written a letter for a while, because frankly not much has changed:

“I have not written to you at any great length since the winter of 2010. This is largely because not much has happened to change our views. We still see the global economy as grotesquely distorted by the presence of fixed exchange rates, the unraveling of which is creating financial anarchy, just as it did in the 1920s and 1930s. Back then the relevant fixes were around the gold standard. Today it is the dual fixed pricing regimes of the euro countries and of the dollar/renminbi peg.”

But it turns out that Hendry is much more bullish on the United States than on China:

We are, as a result, long the debt saddled west and short the vastly over vaunted and over owned BRICs...There is a near consensus that China will supplant America this decade. We do not believe this. We are more bullish on US growth than most. The momentous nature of recent advances in shale oil and gas extraction and America’s acceptance of the unpleasantness of debt and labour price restructuring looks to us as if it is creating yet another historic turning point. By embracing his inadequacies and leaping on his luck, the strong man may have finally broken the binds that had previously held him back. We are also more pessimistic on Chinese growth than ever. This makes us bearish on most Asian stocks, bearish on industrial commodity prices, interested in some US stocks, a seller of high variance equities and deeply concerned that Japan could become the focal point of the next global leg down. On the plus side we also believe that we are much closer than before to the beginning of a bull market of perhaps 1982, if not 1932, proportions. We just need the last shoe to drop.

Could the massive boom in natural gas production trigger an economic windfall much like the discovery of oil in the North Sea did for the U.K. a number of years ago?

As for China, Hendry expects a massive slowdown, but is actually utilize CDS on Japanese companies to bet against China.

So what is the main point that Hendry is trying to make?

Today the key contrarian point I am trying to make is that hyperinflation is not possible without short periods of hyperdeflation, in this case possibly as a result of the death of Asia’s mercantilism.

Hendry goes on to say that the ability to deal with massive volatility is the key to being a great macro hedge fund manager. You can be 100% correct, but if you can’t tolerate the swings from the highs to the lows without blowing up, you will not survive to reap the rewards of your insights.

A great fund manager may even be positioned wrong, but with appropriate stop losses, he will live to fight another day.

Another important trait is the ability to forecast the flight path of future prices. Seldom do prices move in a straight line, but they often fluctuate up and down on the way to their final destination.

I’m sure many of you have seen companies that were on their way to bankruptcy experience massive short squeezes that wiped out many who were betting against them. You have to know the final destination, but be prepared for the detours along the way and survive with enough capital intact to be rewarded for your positioning.

This time an MIT professor and his son have been fined $4.8 million for committing hedge fund fraud. What, no jail time?

According to TheTech, they misrepresented their historical performance by using back tested instead of real results and hide the true nature of underlying losses:

However, the SEC said that the supposed track record was not based in reality, but rather on “back-tested hypothetical simulations,” particularly “hypothetical historical allocations to six hedge fund managers.” Additionally, despite the promise to use Gabriel’s model to trade liquid securities, most of the fund was actually invested in “illiquid investments in other hedge funds” — including funds managed by Bernard L. Madoff — and did not make use of the optimal pricing model.

What is most interesting about this case is that a bunch of fraudsters invested in another fraudster. So much like the subprime bubble where we had CDOs squared or CDOs that invested in other CDOs, here we have fraud squared. Frauds investing in frauds.

Hedge funds can be great investments, but cases like this just make me scratch my head.

Will hedge fund advertising usher in a new era of investment fraud? Time will tell, but according to this article on MarketWatch, chances are good that it will:

The one thing that might have allowed convicted felon Bernie Madoff to run his phony hedge-fund business even longer in the face of an eroding stock market is successful advertising.

With his reputation — which was sterling right up to the moment it was tarnished — the public would have beaten a path to his door if Madoff had been allowed to roll out the general welcome mat as his crisis was coming to a head.

That’s where the concern is, that consumers who are interested in using hedge funds will fall for a slick sales pitch, especially from funds with unproven track records and the greatest need to attract new cash.

“To get to the great hedge fund managers, you have to be a significant player,” said Geoff Bobroff, a fund industry consultant in East Greenwich, R.I. “Those managers don’t need to advertise to attract money and, if they do, it would make you wonder if they were in trouble.”

With that kind of advertising, investors will be best served by ignoring what they see.

And the author of the article is right that the best hedge fund managers will not need to advertise, but the truth is that a lot of good start up hedge fund managers will need to advertise to scale. So it would be wise to avoid throwing out the baby with the bathwater, just because of a few bad apples.

Apparently hedge funds are sucking wind. According to this CBS News article they have lagged behind every major equity index since 2003. They have even lagged a few bond indexes and they have generated this lackluster performance while exhibiting more risk than the underlying indexes. Sound good? Where do I sign up?

The verdict: Hedge funds underperformed every stock asset class over the prior nine years and even managed to underperform the three bond indexes, while taking more risk. In the first quarter, they far underperformed every stock asset class, though they did manage to outperform bonds.

Given the evidence, the only logical explanations I can think of for the continued popularity of hedge funds are that either investors are unaware of the data, or that individuals invest in hedge funds for the same reasons they buy a Rolex or carry a Gucci bag with an oversized logo — they’re expressions of status, prestige, exclusivity, and sophistication. Letting such emotions determine investment decisions is a recipe for transferring assets from your wallet to those of the purveyors of products.

Despite what the author says, I believe that the real reason why people invest in hedge funds is that they think that they can pick the winners that beat the stock indexes. After all, how many hedge fund investors buy hedge fund indexes. They buy individual funds. Buying a hedge fund index kind of defeats the whole purpose of investing in hedge funds, don’t you think?

Renaissance Technologies launched a new hedge fund in March. The fund is called the Renaissance Institutional Diversified Alpha Fund or RIDA for short and it is already up 3% in its first month and a half of trading. The new fund trades stocks, futures and forward contracts. This new fund is not benchmarked against anything so it would appear that its main objective is to generate absolute returns, which given Renaissance’s trade record are likely to be consistently high. But only time will tell.

According to Pensions&Investments Renaissance’s other funds are also doing quite well at the moment:

Renaissance already runs the $7 billion Renaissance Institutional Equities Fund and the $4 billion Renaissance Institutional Futures Fund, along with a third fund that is open only to the firm’s employees. The equities fund, known as RIEF, climbed 11% this year through April 13 and 35% last year, the person said.

Most of the time it pays to sell insurance, how do you think Warren Buffett became one of the richest men on the planet? He is known for being a shrewd investor, but the bulk of his fortune was built upon insurance companies.

When insurance is underwritten properly, it is one of the most lucrative businesses in the world. But when it is done wrong, massive amounts of money can be lost.

Just think about it.

How much do you pay for life insurance, health insurance, fire insurance, homeowner’s insurance, liability insurance, and so on? All that money you are paying has to go somewhere and that somewhere is your insurance company’s bottom line.

One of the ways that hedge funds make a lot of money is by selling insurance. But they normally don’t call it that. In the hedge fund world, they typically call it volatility selling.

Usually this involves selling options like puts and calls, which are really just insurance policies on the price of a stock or a stock index.

A put for example is like an insurance policy to protect a portfolio if a stock craters. You can buy a put to protect your portfolio in the event of a market crash. But the really cool thing is that you can do the opposite and sell a put too. You can essentially become a mini insurance company and make money if the market does not crash.

Now options are perceived as extremely risky, but it isn’t the option that is inherently risky, it is how the option is used.

For example, let’s say you want to own a stock at $50 dollars per share, but it is currently selling for $55. You could buy the stock for $55, but if it falls to $50 you are going to feel foolish.

What you could do instead is sell a put option with a strike price of $50 and collect a few dollars upfront.

If the stock stays above $50, you will get to keep the premium that you collected. What’s more you can sell another put and collect even more premium.

If the stock falls below $50, the person you sold the put to will sell the stock to you for $50. But you get to keep the premium that you collected, so you are already ahead. Plus you own a stock at that price that you were willing to pay for it.

When you compare put selling to just buying the stock at $55, which was an unattractive price to you, you’ll see that you come out ahead. If the stock goes down, you get the stock at the price that you want and you get to keep the premium. If the stock stays flat or goes up, you get to keep the premium and write another policy by selling another put.

Overall, you can make more money, while taking less risk than buying the stock outright. What’s not to like about this excellent hedge fund strategy?

A 78 year long ban on hedge fund advertising has been lifted. (And I didn’t even know that hedge funds had been around that long.) Actually this was a ban on private placement advertising of which hedge funds and other private investments happen to fall under. This means that hedge funds can now use general advertising. But they will still only be able to accept accredited investors.

Here’s what FINalternatives had to say:

“[T]his is really going to benefit them, I believe, more than it will benefit the multi-billion [dollar] funds. They have people waiting to invest, so you’re unlikely to see those Bridgewaters and so forth out there with a billboard in Times Square. But you will probably see additional advertising through online channels…You’ll probably see people being a little more comfortable talking to the media, and I believe that those are significant changes for an industry that has had to be so hyper-careful about what they say and who they say it to.”

Ackles told FINalternatives the new regulations could improve public perception of the hedge fund industry:

“[P]eople often believe the hedge fund industry to be mysterious and that’s because they don’t have access to all the information that these qualified investors have had access to and now that some of those restrictions—not all of them—are lifted, or will be lifted within 90 days of the president actually signing [the JOBS Act], that should allow the industry to engage more with one of its key constituencies—which is Main Street.”

Excuse me but when has Main Street been one of the hedge fund industry’s main constituencies? To invest in a hedge fund you typically need one million dollars in liquid assets. Since when does Main Street have this much money under the mattress. In case they didn’t notice the average 401K balance of workers approaching retirement is under $100,000. I guess they are talking about a different Main Street.

My take is that the archaic accredited investor limitations should be removed and everyone should be allowed to invest in whatever they want. It should be left up to the investor to determine what is suitable and what is a good investment. After all if the average investor isn’t protected from investing in the fiasco that is the TVIX, which actually fell in value when it should have risen in value, shouldn’t they be allowed to invest in something like the Medallion Fund which seems to mint money?

And hey, I as the proprietor of a hedge fund blog, I kind of like the abolition of this archaic rule. Now I can sell advertising space to more hedge funds. What’s not to like. Will taking advertising dollars influence my opinions? Oh no, I’m totally impartial and unbiased. :-7

Who would have thought that the Pentagon had a hedge fund? Just think how well it would perform with advanced knowledge of military operations.

Okay Mr. President, you want us to go after Iran? Sure thing. Hey Joe go buy 1 million futures contracts on oil before news of the strike hits the wires.

Okay, okay the Pentagon doesn’t really run a hedge fund. But Pentagon Capital Management is on the hook for a cool $100 million. It looks like it was fined for improper mutual fund trading.

According to the Telegraph:

Pentagon Capital Management, which was run by Lewis Chester, a contemporary of David Cameron at Oxford University, was ordered in February by US District Judge Robert Sweet to pay $76.8m after the fund was found to have engaged in late trading in mutual funds between 1999 and 2003.

That amount was increased by $21.7m in “pre-judgment interest”, according to a court ruling by Judge Sweet last week.

The Securities Exchange Commission issued charges against Pentagon in 2008 after the regulator embarked on a crackdown on the abuse of trading in mutual fund shares.

So far hedge funds are off to a very weak start this year. In aggregate they are only up 2.21% and actually fell during the month of March. They are seriously lagging behind the S&P 500 right now. But its hard to blame them a monkey throwing darts at a bunch of ultra long etfs appears to have been the best strategy year to date.

This is what FINalternatives had to say:

The first quarter came in like a lamb for hedge funds, but went out somewhat more fiercely than the industry would have liked.

After two mostly positive months, all hedge fund strategies lost ground in March, according to the Credit Suisse Liquid Alternative Beta indices. The overall index dropped 0.83%, cutting its year-to-date gain to 2.21%.

By contrast, the Standard & Poor’s 500 Index rose about 3% and is up more than 10% on the year.

So far, this is not a market for stock pickers. But it sure has been a great market for buy and holders.

Poor hedge fund managers, 2011 has been a rough year for them. Their pay is down 35% relative to 2010. All the top hedge fund managers made in 2011 is a piddly $14.4 billion. I guess that they are going to have to cut back on their private jets, mansions, Ferraris and $100,000 bottles of champagne.

The highest paid fund manager of 2011 was Ray Dalio of Bridgewater Associates. He made a paltry $3.9 billion which pales in comparison to John Paulson’s $4.9 billion in 2010. But poor John Paulson didn’t even make the list of highest paid hedge fund managers this year, since performance of his funds were horrendous in 2011.

GreenwichTime.com had this to say about Bridgewater:

Bridgewater, which manages $70 billion of hedge fund assets, uses a macro strategy to try to profit from economic trends. It profited last year by predicting global economic headwinds would trigger a flight by other investors to safer assets such as U.S. Treasuries and German bunds. Dalio, 62, has earned $8 billion over the past two years, AR Magazine said.

Read more: http://www.greenwichtime.com/news/article/Dalio-tops-list-of-U-S-hedge-fund-managers-pay-3447852.php#ixzz1ql0X779w

Number two (or in other words the first loser) on the list was Carl Icahn who made a minuscule $2.5 billion. How is he going to get by on such a small sum of money?

GreenwichTime.com says this about Icahn:

Icahn, who returned all outside money in his hedge funds to clients last April, profited from his investment in El Paso Corp. after Kinder Morgan Inc. agreed to buy the natural gas pipeline company.

Read more: http://www.greenwichtime.com/news/article/Dalio-tops-list-of-U-S-hedge-fund-managers-pay-3447852.php#ixzz1ql0yHduN

Number three on the list, I won’t even mention his name but his fund is Renaissance Technologies. He only made $2.1 billion. Such a small sum of money hardly deserves a mention. I mean what can $2.1 billion buy these days?