Passport Capital is a $3.8 billion hedge fund that is managed by John Burbank. It seems that Burbank’s hedge fund has run into some hard times in 2011 and after a dismal year it has been forced to layoff 14 of its employees.

According to BusinessWeek:

Passport’s dismissals include seven employees on the investment staff, said the people, who asked not to be identified because the information is private. Passport, which slumped 18 percent in 2011, gained 3.7 percent this year through February, the people said.

This once high-flying hedge fund was founded by Burbank in the year 2000. For a while it had a very good run, but now, not so much. In 2011, this multi-strategy hedge fund experienced a traumatic 18% draw-down.

It seems that the high salaries earned by hedge fund managers are affecting other markets beyond high priced mansions and exotic automobiles. Even nannies are benefiting from the largess of wealthy hedge fund managers and other affluent families. In this NY Times article I found out just how astronomical a nanny’s salary can be:

Then we both laughed, because there is no way I could possibly afford her. As one of New York City’s elite nannies, Muneton commanded around $180,000 a year — plus a Christmas bonus and a $3,000-a-month apartment on Central Park West. I should be her nanny.

$180,000 per year not at all bad for watching a few spoiled rich kids. Well, life as a nanny is harder than you think and if you are thinking of joining their ranks, you had better know a few things like:

And, alas, it seems that there just aren’t enough “good” nannies, always on call, to go around. Especially since a wealthy family’s demands can be pretty specific. According to Pavillion’s vice president, Seth Norman Greenberg, a nanny increases her market value if she speaks fluent French (or, increasingly, Mandarin); can cook a four-course meal (and, occasionally, macrobiotic dishes); and ride, wash and groom a horse. Greenberg has also known families to prize nannies who can steer a 32-foot boat, help manage an art collection or, in one case, drive a Zamboni to clean a private ice rink.

Speaking French, knowing how to cook a four-course meal and oh, having no life at all outside of caring for the kids. Sounds like fun. Are you ready to sign up for that?

Lee Ainslie’s Maverick Capital used to be one of the biggest, baddest hedge funds around. But recently it hasn’t been doing so well. In 2011, his Levered Fund was down 30.7% and this goes to show you just how tough of a year 2011 was for hedge funds.

According to Ainslie, his fund under-performed because:

While the environment for fundamental investing was certainly unfavorable last year, such factors do not fully account for our results. Maverick’s poor performance was primarily driven by a handful of individual mistakes and insufficient risk constraints.

And according to Market Folly, Maverick has implemented a new risk management system to improve their performance:

In order to address risk management, they’ve implemented MavRank, a quantitative system driven by fundamental inputs that helps make recommendations for position sizing. While Ainslie stressed that all decisions will still be made by humans, the full implementation of quant tools is interesting.

Lee Ainslie Expects Volatility

One thing Ainslie noted is that volatility is becoming a huge factor in the market (with the recent performance of the VIX not withstanding.) He mentions that he expects much greater volatility in the future and will try to keep the volatility of Maverick lower with his new risk management system:

This leads to our conclusion that volatility spikes are likely to continue to occur more frequently, and, therefore, future levels of equity volatility are likely to be higher than those seen in the past. As a result, going forward we will seek to continue to maintain volatility in the 10-12% range in our core funds, even though we expect this level of volatility is likely to be less than half of the equity market’s volatility. To help achieve this objective, we have lowered our long-held gross exposure target to 225% from 250%(our long-term average gross exposure has been 248%), among other steps. (We have also decided to maintain our 1.5:1 long/short ratio, which translates to a slight reduction in our target net exposure from 50% to 45%.)

Read more: http://www.marketfolly.com/2012/03/lee-ainslie-maverick-capitals-2011.html#ixzz1pgdWMuac

Hugh Hendry is a hedge fund manager who runs Eclectica Asset Management. He is Scottish and comes from working class parents. He is a little rough around the edges and definitely stands out among his more genteel competitors. He has a sharp tongue and is known for being highly critical when others try to take stands contrary to his own positions. But more often than not he has been proven right.

Hendry’s Principles for Investing

Hendry has granted fewer and fewer interviews in recent years. Part of this stems from the fact that his investors would rather he keep his contrarian views to himself and Eclectica so that they can make more money and stay out of the prying eyes of the media. But in a rare interview with Barrons, Hendry talked a little about the investor that he holds in the highest esteem and his principles for investing:

Barron’s:What makes a great macro fund manager?

Hendry: First and foremost, an ability to establish a contentious premise outside the existing belief system, and have it go on and be adopted by the rest of the financial community. My great hero is [Caxton Associates’ founder] Bruce Kovner, who was able to imagine the dollar falling to 100 yen—when the rate was 200. I am an existentialist. To my mind, the three most important principles when it comes to investing are Albert Camus’ principles of ethics: God is dead, life is absurd and there are no rules. Of course, that’s a doctrine of promoting the individual. You own your own decisions. As CIO of Eclectica, with $700 million [under management], I have no engagement with the sell side.

A Few Salient Quotes from Hugh Hendry

“My CEO has banned me from media.” In response to why his media appearances were becoming more infrequent. I guess he has a habit of scaring investors and upsetting journalists and their other guests.

“I would recommend you panic. The European banking system is in a crisis.” Not much to say here. If not for massive injections of liquidity from the ECB things would have imploded long ago.

“Let’s purge this system of its rottenness. Let’s take on a recession. It’s going to be tough, people are gonna lose their jobs. They are going to lose their jobs anyway. We can spread this over 20 years, or we can get rid of it over 3 years.” Hendry is probably right, but will this happen? The answer is probably no. It is a matter of game theory and self interest of all parties involved to keep the shell game going as long as possible. So expect the malaise to last a long time.

“I want to short people like me.” In this video, Hendry lets the self-loathing come out. Well, not really. But he makes a point that we can’t all be hedge fund managers.

All in all Hendry is quite the character, but his returns speak for themselves. He really seems to shine when all hell breaks loose. And you can bet that he will make money when everyone else is losing theirs.

Third Point Hedge Fund is managed by Dan Loeb. It has $8.9B in assets under management and Loeb is a noted stock picker and value investor.

Market Folly has posted a copy of Third Point’s 2011 Letter and it is full of insights regarding how a top hedge fund manager thinks about his investments and the thesis behind a few of his more interesting investments:

Loeb’s firm has focused on two areas recently: forced selling and hidden growth. Positions they’ve acquired when others have been forced sellers are Unicredit, Skyworks Solutions (SWKS), and EksportFinans.

Under the hidden growth thesis, they’ve invested in a long credit position in Ally Financial, as well as long equity stakes in Volkswagen and Abercrombie & Fitch (ANF). They acquired their position in Abercombie in January after shares had been cut almost in half

Investing is all about finding value and value is usually not found in areas where everyone is looking. That is why Loeb’s strategies make sense.

Loeb is also known for his activist letters. His letters can be quite pointed when he feels that a company’s management isn’t up to snuff and they make very interesting reads.

Hedge Fund Billionaire Dan Och is sued by one of his former traders for $150M. Arnaud Achache made a ton of money trading for Och but I guess he wants a little (make that a lot) more. Achache is suing Och for $150M for wrongful termination. He claims that Och systematically began eliminating the junior partners of the firm so that he (Och) could keep more of the proceeds from the firm’s pending IPO for himself.

An article on Forbes lays out all the juicy details including:

For years it appears, Achache made lots of money at Och-Ziff. Achache claims he received a 1% ownership interest in  the hedge fund firm after he became a non-managing member in 2005, which was used to calculate his share of the incentive and management fees generated by the firm. The lawsuit says Achache’s interest was cut to 0.962% in 2007, but Achache was still making plenty of money over and above his share of the fees—when Och-Ziff borrowed $750 million to finance a $720 million dividend in 2007, Achache got $257,000. The lawsuit suggests Achache got around $19 million from the IPO proceeds and claims he got $4 million less than he would have received had his ownership interest not been reduced.

Achache does not explain in his lawsuit why he waited three years to file a complaint against Och.

When it comes to the top hedge funds, massive law suits are almost par for the course. When big egos are involved and even bigger amounts of money are in play, you can bet that things will get exciting.

Saw an interesting post by Bruce Krasting on ten year rates where he poses the question is the 10 year going to 3%?

At some point the answer has to be yes. China has trimmed its holdings by 260B. Banks have been buying hand over fist, but now they own 1.8T. But the treasury is ejecting $100B per month of new borrowing.  So of course Krasting gives us the easy answer of who will buy all of these treasuries:

The easy answer to this conundrum is that the Fed will just keep buying more bonds to keep rates artificially low. I say it can’t do that. If the Fed announced tomorrow that it was going to TWIST the market to keep the ten-year at 2%,  crude would rise $150 in a month. Bernanke understands that.

Bernanke may understand this, but is he really going to take his foot off the gas? Who knows? It seems that the easy way out is inflation, rather than a hard crash in financial assets and massive deleveraging in the credit markets.

Natural gas prices are extremely low, yet gas prices are hitting new highs in the U.S. The core of Obama’s energy independence strategy is to utilize natural gas as a source of fuel for vehicles. But the problem is that natural gas prices are so low, no one really wants to drill for natural gas. Further, production decline rates on well that use fracking are exceptionally rapid. When you combine these two factors, according to Testosterone Pit, we go from glut to shortage in the blink of an eye.

So these noble ideas of how dirt-cheap natural gas will perform miracles, as ballyhooed by the White House, will smack into reality: at current prices, drilling activity will continue to shrink while production at wells drilled over the last two years is plunging. At some point, the massive amount of gas in storage will be drawn down below a normal level. But production can’t be cranked up from one week to the next. Perceived or real shortages will drive up the price, but not to an equilibrium where producers barely break even and consumers enjoy low-cost energy. It will be a spike. We’ve been through this before.

Meanwhile, Republicans are trying to tar President Obama with gasoline prices that have gone the opposite way. The strategy is working. Obama’s approval rating on handling gas prices has plunged. In San Francisco, gas is already $4.50. Yet across the Bay are five oil refineries that together are the largest exporters of petroleum products in the nation.

The situation in Europe is getting worse than ever but stock markets around the world are shrugging this off. The debt super-cycle has reached a point in Europe where there are no good solutions. Austerity measures to cut budget deficits will back fire because they will cause the European economy and tax revenues to fall faster than the savings that they produce. Allowing countries to default on their debt will ripple through the European banking system and cause banks which are already teetering on the edge of insolvency to go bust. Devaluation or essentially default by inflation also does not work because of the common currency. Sure it will make all of Europe more competitive against the rest of the world but glaring trade imbalances internally will remain as German exports will get cheaper to the same degree as exports from the periphery. They only way to adjust these imbalances with a common currency is for laborers in the periphery to take massive pay cuts (like this will ever happen voluntarily.)

Soon Greece will be front page news again as they try to persuade hedge funds and other private investors to take a “voluntary” 50% hair cut to avoid triggering credit default swaps. If you are a hedge fund manager, why would you ever voluntarily agree to do this? You can hold out and if everyone else agrees to take a hair cut Greece will be in a better position to pay you and you will make out like a bandit, getting paid at par. If nobody else agrees to the hair cuts, Greece will default and trigger the credit default swaps that you bought (you did buy CDS didn’t you) and you will get paid at par. The alternative is that you are the whipping boy and you “voluntarily” take a haircut while the ECB, IMF and other favored entities are paid off at par and end up laughing all the way to the bank.

So with all of this going on: how do Greece and the rest of Europe avoid a financial implosion?

You really owe it to yourself to read the full piece by John Mauldin.

The Largest Hedge Funds in the World

Who are the largest hedge funds in the world? Recent market turmoil has rearranged the list, but a few top hedge fund managers with famous names like Soros, Dalio and Paulson still top the list.

Bridgewater Associates Hedge Fund

At $59 billion, Bridgewater Associates is the largest hedge fund in the world. But it wasn’t always so big. Just a brief ten years ago, it was scraping by on a relatively paltry $2 billion in assets under management, but this last decade has been one of staggering growth in AUM. How did it attract so much capital? First it performed really well. Ray Dalio got things right in 2008 and did really well when other large hedge funds stumbled. Great performance lead to a huge influx of assets and of course compound growth in AUM didn’t hurt either. Bridgewater was founded by Dalio all the way back in 1975 and it wasn’t until 1987 that is amassed $5 million in assets. From that $5 million, it took nearly 15 years for it to reach $2 billion in AUM in 2002. Then the trip from $2 billion to $59 billion took a brief 9 years. Will the Bridgewater hedge fund keep growing at an exponential rate? Only time will tell. Most of the time when hedge funds get larger their performance tends to suffer. But if anyone can beat the odds, Ray Dalio is as good of a bet of any.

JPMorgan Asset Management

The good folks at JPMorgan have $54 billion under management in their hedge fund division. This is quite a stunning figure and makes them one of the largest hedge funds on the planet. But it still pales in comparison to the size of the rest of the firm. JPMorgan has one of the biggest balance sheets in the world. It has assets of $2.3 trillion (this is trillion, not billion!) and a derivative exposure of $90 trillion. When put in this context $54 billion doesn’t seem like as big of a deal as it really is. In fact, JPMorgan’s entire asset management division oversees a total of $1.3 trillion, which is a vast sum of money.

Man Investments

$40.6 billion is the size of Man Investments assets under management. Man Investments is controlled by Man Group, which has quite an illustrious history. Man Group was started by a barrel maker named James Man, all the way back in 1783 so it is more than 200 years old. Back then, Man won a contract to supply the Royal Navy with rum and he made a lot of money doing this, because in those days every sailor was entitled to a ration of a half pint of rum per day. From rum, Man moved into trading and brokering commodities and then into trading financial contracts and finally into hedge funds and growing its business into one of the largest hedge funds in the world. Overall, Man has made a number of great moves in the financial markets, but one of its slipups was investing $360 million dollars of its client’s money into Bernard Madoff’s ponzi scheme/hedge fund.

Paulson & Co Hedge Fund

Paulson used to run a much larger hedge fund, but after a disastrous 2011, in which his main fund the Advantage Plus lost more than 50%, bringing his assets under management down to $36 billion and moving him lower on the list of the biggest hedge funds. Paulson’s hedge fund really shined in 2008 when his wagers against subprime paid off handsomely, though a lot of credit probably should go to Paolo Pellegrini for keying him onto this trade. But in 2011, what killed his assets under management were bad trades betting on a rebound in financial stocks, gold and of course Sino-Forest. Will the Paulson hedge fund regain spots on this list of largest hedge funds? It’s hard to tell but the odds are stacked against him. To regain its former glory after a 50% loss, his hedge fund will need to stage a 100% gain.

Brevan Howard

Brevan Howard runs $32 billion in hedge fund money, which is not bad for a firm that was started only a decade ago in 2002. In 2008, their hedge fund had a 20% return in a year when most funds were down double digits. And it staged a repeat performance in 2009 turning in an 18% return.

Soros Fund Management

Even though hedge fund manager George Soros closed his fund to outside investors he still manages a massive $28 billion in his hedge funds. So even without outside money he still has one of the largest hedge funds anywhere. Soros started Quantum Fund back in the 1970s with analyst extraordinaire and investment biker Jim Rogers. In the 70s and 80s Quantum Fund was the top performing hedge fund in the world and attracted a lot of money. It made so much money that Rogers retired from managing money and spent a number of years traveling around the world. But Soros kept on running money and virtually all of the money his firm manages is his own and that of his family.

SurlyTrader: A Bull Trap?

Bullish sentiment is rising, the VIX is falling; a bull trap could be forming. The scenario: a marginal new high and all the longs and under invested hedge fund managers start buying heavily and the shorts abandon ship. Then when everyone is long, a massive sell off ensues. Everyone is aware of the inverse head and shoulders and the resistance at 1292 and when everyone is aware of something, it rarely works as it should. Tensions in Iran could goose the price of oil, but what could result in lower oil prices? The only thing that comes to mind is a global recession. So if oil prices keep rising how does that affect earnings and of course stocks?

Doug Kass is Bullish

Big surprise, but he was largely right of 2011 being a flat year so let’s give him a little benefit of the doubt. What is one of the reasons for his bullishness? Important market participants like hedge funds and other big investors are underinvested (at least according to him) so they will feel compelled to buy. But with all the iceberg risk lurking under the surface are hedge funds really underinvested or are the positioned properly for the fat tails and black swans that are still lurking in 2012?

Mish: Greece struggling to buy Aspirin, but no problem buying tanks and submarines

Good to see that the Greeks have their priorities right.

Charles Hugh Smith: Health is the True Wealth and How Doctors Choose to Die

Treating chronic illness is much more profitable than promoting simple lifestyle choices that prevent illness. Perhaps that is why so much is spent on sickcare instead of preventative healthcare. Health is the true wealth because without health, wealth cannot be enjoyed for long. Everyone dies (this includes doctors too), but not everyone truly lives. What do doctors do when they are dying? They know about the latest medical treatments and they generally have good access to these treatments. So why do many doctors not take advantage of them and instead focus on spending more time with their families as their time draws near?

Simon Black: 308M Americans are getting hosed

Your banker is being forced by the government to spy on you. In the world of financial transactions, instead of innocent until proven guilty, you are guilty unless proven innocent and your assets could be completely frozen even if you are innocent. So you’d have no way to hire a lawyer to defend yourself against false accusations. What is your backup plan?

Mish: The Pink Elephant in the Room

Exponential population growth meets limited resources. Will technology save the day? Will population growth slow down into a soft landing? Or will something much more sinister, like a population overshoot, happen?

Mish: Iran not developing nukes?

At least that’s what Defense Secretary Panetta says.

Mauldin: Shilling’s Forecasts in One Word

Deleveraging

Bob Januah: Nothing’s Changed

Too much debt; only action by policy makers is to print more and borrow more; the eurozone is still doomed; expect QE3; growth is slowing despite fleeting countertrend spikes; still targeting S&P at 800.

Middleton: An Inferior Educational System is What Ails Us

After channeling Du Bois, Middleton describes what is wrong with the American educational system and posits a few thoughts on how to fix things. It is a very long read and will get much longer as this is only the first part of a multi-part treatise.

Charles Hugh Smith: Preparing for the End of the Central State

The central state and other large institutions are topping out, local post offices are being shut down and even Walmart is hitting the peak of its growth curve. Depending on a strategy of begging for central state funding of local initiatives is doomed to failure as central states are on the wrong end of the S-curve. The solution is localism.

Greg Simmons and Matt Davio: No Place to Hide

All correlations have gone to one. There is no place for hedge fund managers to hide. Zero rates and baby boomers not going to come back and invest in stocks or real estate. It’s never been this hard to make money trading. The new normal is a lack of normal and will be with us for a long time.

Stansberry Radio: 10% is enough for God, so 20% should be enough for the government

“It’s much better to sell investment advice than take it.” Stansberry: the US needs a balanced budget amendment, sound money and limits to taxation. Citizens should have an affirmative right to keep 80% of their income and this should be written into constitution. A 10% tithe is enough for God, so the government should be content with taking a maximum of 20%. The unemployment rate for returning veterans is approaching 30%. This is not good.

Malcom Gladwell: Late bloomers

Late bloomers require experimentation and life experience to perfect their craft. In the beginning they look the same as non-bloomers, but what separates them is persistence. Hedge funds resemble early bloomers, they have to perform each quarter or they lose their investors. So there are no late bloomers in the hedge fund world.

John Mauldin via The Big Picture: Path Dependency and the Debt Supercycle

Path dependency is when you go down a one way road and there is no turning back. One example is having a baby, when you are 8.5 months pregnant there is no turning back to not having a baby. That is path dependency. Another example has to do with debt, once you buy a home you have to make mortgage payments. If your mortgage is underwater, you probably can’t sell the home or your choices are to keep paying the mortgage or walk away. This is also path dependency. The nations of the world have borrowed so much money that in many cases there is no turning back. The choices will be defaulting on the debt or printing more currency and debauching their currency. Essentially the choice is between a short swift recession or a long and drawn out depression. Neither is very appealing.

Ritholtz: How to be a good forecaster

Forecasters suck. Most forecasts are wrong. Always couch your forecasts in probabilities that way you are always right no matter what happens. Avoid making forecasts whenever possible.

Jim Quinn: The Year of Living Dangerously

Making predictions is tough, but when the planets line up, something is bound to happen. Debt, civic decay and global disorder, these are the things to watch out for in 2012. Hedge fund managers that are on the ball are going to thrive on the volatility in 2012, but those that fall asleep at the wheel are going to suffer.

Debt

Debt to GDP of 90% is the point of no return and almost all developed counties have exceeded this level, and the off balance sheet entitlement promises are four to six times greater than the official numbers.

“Those who remain unconvinced that rising debt levels pose a risk to growth should ask themselves why, historically, levels of debt of more than 90 percent of GDP are relatively rare and those exceeding 120 percent are extremely rare. Is it because generations of politicians failed to realize that they could have kept spending without risk?” Rogoff & Reinhart

Civic Decay

Occupy Wall Street is only the beginning. The middle class is being wiped out. Is having 15% of the population on food stamps a sign of recovery? 50% of American workers don’t pay federal income tax, but 50% of American workers make less than 25K per year. They still face numerous state and city taxes and fees as it gets harder to put food on the table, tempers flare.

Global Disorder

Inflation is exported from the developed world as money is printed and more debt is issued to continue running trade deficits. Food prices continue to rise and the poor of the developing world struggle to feed their families. Food riots ensue. Despite a global slow down, oil prices continue to remain high as oil production rates are falling. Since the developed economies of the world run on oil, tensions over oil supplies rise to a boiling point.

Minyanville: Even a Rich Kid can join the 99%

The times are a changing.

Mish: If I could turn back time…

Time traveling with Ron Paul: what if we could redo the last eight years with Ron Paul as president? There would be no Fed. The US would have saved $1T in Iraq. US citizens would pay less in taxes and keep more of the money that they worked for. The US would not be spending billions imprisoning non-violent drug users.

Charles Hugh Smith: The Real Reason WWII Ended the Great Depression

How WWII ended the Great Depression and why current policies are doing the exact opposite.

Hedge Funds for Dummies is a book about hedge funds. Now that’s a shocker. But it really isn’t just for dummies it’s for anyone (including smart people, like you) who want to know more about the complex world of hedge funds. It was written by Ann Logue and attempts to address the key questions that you might have about hedge funds.

It starts by addressing the age old question: “What is a hedge fund?” And it progressively delves deeper and deeper into some of the other questions that you might have about these secretive investment vehicles, like whether hedge funds are right for you and how to set up the right hedge fund investment strategy. It even covers how to perform due diligence on a potential investment and hiring a consultant to choose the right hedge funds for your personal circumstances.

So what is a hedge fund?

A hedge fund is a lightly regulated investment that is managed by a financial professional known as a hedge fund manager that invests or even trades in a diverse set of securities in an attempt to generate higher returns with less risk.

What sets hedge funds apart from mutual funds?

The primary difference between hedge funds and mutual funds has to do with regulation. Hedge funds are more lightly regulated than mutual funds and so regulators generally require that they are only offered to sophisticated accredited investors only.

Another big difference is in fund manager compensation. Hedge fund managers are compensated with a performance fee that is based on how well their funds perform. While mutual fund managers are only compensated on the size of their assets under management. This gives hedge fund managers a greater incentive to generate higher returns than mutual fund managers.

What is good about Hedge Funds for Dummies?

The best part of this book is that it delves a little deeper into hedge fund topics that really matter. For instance, it covers hedge fund due diligence. This is an absolutely critical aspect of hedge fund investing. If your due diligence is weak, you may find yourself a victim of a fraudster like Bernard Madoff. Obviously, no one wants that. So pay close attention to the chapter on hedge fund due diligence.

Another good part of this book focuses on evaluating hedge fund contracts. You should have a good understanding of all the terms and clauses in any contract that you sign. You should have a good grasp on lockup provisions, sidecar clauses and other contractual provisions that could be harmful to your interests as a hedge fund investor. A close reading of all hedge fund contracts and an understanding of their clauses is critical to protecting your investment capital.

All in all, Hedge Funds for Dummies is a good book to learn more about hedge funds even if you aren’t a dummy.

Todd Harrison: I am Gross
Well Harrison didn’t exactly say that, but he mentions that after reading Bill Gross’ latest missive, their views are becoming more closely aligned. Deleveraging is the big issue and things get jiggy when rates near the zero bound. One scenario posited by Harrison is a bounce to S&P 1360 based on the reverse head and shoulders, plus the fact that this is an election year. Then a big crash based on the fundamentals of deleveraging and running into the zero bound of interest rates, unless of course rates go negative.

Charles Hugh Smith: Putting Iran Out of Business
Smith offers a novel idea of how to topple Iran’s regime without risking the lives of soldiers and billions of dollars in military expenditures. Oh, and it will make it cheaper to fill up your gas tank and heat your home too. But there is one catch…

Gregor: Food Price Increases
Why food prices are rising: bad weather, running out of arable land, running low on water, changing rain fall patterns, rising energy prices, rising NPK prices and population growth. Countries that are low on water or on energy can synthetically import these commodities by importing food. But when countries like China and India with two billion hungry people to feed import food, they have a global impact on food prices.

ZeroHedge: Hedge Fund Winner and Losers
It must feel good to be Jim Simmons and horrible to be John Paulson. Simmons’ RIEF is up 34.66% for 2011, while Paulson’s Advantage Plus is minus 47.77% (that will leave a mark). I hope that your portfolio contained a few hedge fund winners in 2011.

Zero Hour: The Zero Bound of Interest Rates
Now we only need $4 of debt to create a dollar of GDP. What can go wrong with this?

Mish: Hyperinflation is not a monetary event
Need I say more?

“As a general rule, losses make you strong and profits make you weak.”
~ William Eckhardt [If you don’t know who Eckhardt is, you don’t deserve to call yourself a trader.]

Todd Harrison: Ten Themes for 2012
Some of the more interesting themes include: higher interest rates, all eyes on Germany regarding further debt issuance, more geopolitical strife, financial asset performance driven by policy makers instead of fundamentals, and family values will gain in importance.

That’s Gross
Bill Gross is shifting from a muted growth “new normal” to a bimodal fat tailed forecast, which includes black swans. We risk massive deleveraging and deflation on the one hand or monetization and enormous inflation on the other hand. And who gets to decide which outcome occurs, omniscient policy makers, of course.

Mish: 2012 Debt Rollovers
If you thought Europe had it bad, take a look at Japan, it has to roll $3T of debt in an economy with a GDP of $5.5T. If rates ever go up to 3% in Japan, they are going to have to spend all of their tax revenue on interest alone.

To Be Awesome
Chris Guillebeau: “To be awesome in 2012, ask what the world truly needs that you can genuinely provide. Then, spend some time every day for the rest of the year building that thing. Better get to work: you only have 361 days left.”

Why markets have become so difficult to trade
Fiscal and monetary policies are distorting market signals. Trading in the current environment is like flying an airplane with miscalibrated instruments.

Mr. Dalio, I presume
Hedge fund firm Bridgewater’s AUM has surpassed $120B. Wow! Expect slow growth and high unemployment throughout the developed world for at least another decade. Deleveraging will take 15 to 20 years and we are only four years into it. This will keep interest rates in the U.S. low for years.

Paul Krugman: We need more debt
According to Krugman, all our problems would be solved if we would simply take on more debt. The reason we haven’t had a stronger recovery is that we haven’t assumed enough debt. The time for austerity is when the economy is doing well. So during the latest boom, why didn’t government rein in spending and pay off more debt than it did?

Ron Paul Unelectable?
Granted, Paul is a long shot, but unelectable?

Simon Black: Simple Truths for 2012
Western nations are insolvent. Economic growth is unlikely. Social unrest is the end result, while governments will expand their powers at our expense. When things fall apart, they will fall apart fast. Be prepared.

Chart of Hedge Fund Performance 2011
Take a look at the chart at the top of this article for a quick overview of hedge fund performance in 2011. It’s ugly, just extremely ugly.

Online Reputation Management for Hedge Funds

Online reputation management is becoming increasingly important for hedge funds and other companies that want to raise capital. Often a single unwarranted negative comment is enough to make a prospective investor pass on what would otherwise be a very compelling investment. As a hedge fund manager or a CEO looking to raise capital, you can either fall victim to unwarranted negative press or you can rise above the negativity by employing an online reputation management service or bringing the online reputation management process in house.

Online reputation management is essentially an offshoot of traditional search engine optimization. The goal of SEO is to get a single listing, for example the url of your website to the top of the search engines like Google, Yahoo or Bing. Online reputation management is similar to SEO but is a lot more involved. The typically scenario is this: a disgruntled investor or a competitor posts an unwarranted negative article on their blog and this story attracts enough attention to rise to the top of the search engines and damage your reputation and turn away potential investors in your hedge fund or business.

You could do nothing as this negative publicity harms your business prospects or you could strike back with online reputation management.

What this would entail is essentially making sure that the search engines rate the positive things that people have to say about you more highly than the negative stories. (Now keep in mind that if people are saying bad things about your hedge fund because they are true, online reputation management would be a losing battle for you. It is only going to be effective if the negative publicity is truly unwarranted.)

Step 1: News Generation

The first step in online reputation management is ensuring that all of the good news about your hedge fund or company gets out. Often there is a lot of good news that simply goes unreported. Your job is going to be getting all of this good news out. When your fund does something newsworthy, issue a press release. When you have a relevant story, contact the top bloggers in your industry. And always utilize your own news outlets, such as blogs and social media. The real key is to tell your story in as many places as possible so that the word gets out.

Step 2: Promotion

Now that there is a lot of raw material in the form of good news about your hedge fund or company out there, the hard work of the second step is about to begin. The second step is promotion of all of the good news and buzz that was generated so that the search engines begin to rank all of the favorable news about your hedge fund or company above that of the unwarranted negative article. This is akin to standard SEO except now the goal is to get ten different urls ranked highly on the first page of the search engines instead of a single url. The reason you need to get ten different urls ranked is that this is the number of results displayed on the first page of the search engines. With online reputation management you will need to ensure that favorable news dominates all of these positions so that the unfavorable news story is pushed off the first page of the search engines where no one will see it.

Now, how all of this promotion of positive news occurs is beyond the scope of this article, but it entails the creation of positive references or links to the good news articles by search engine approved methods of reaching out to influential bloggers and websites and sharing your story to encourage links to these articles that showcase your hedge fund in a favorable light.

What to Expect

So as the online reputation management process starts to take effect. The unwarranted negative news about your hedge fund or firm will be slowly pushed lower and lower in the search engines and replaced my many favorable articles about you and your firm. Remember the negative effect of one unfavorable mention of your fund has at least ten times the effect of a single positive mention. So as the favorable stories start to overwhelm the negative one, you will begin to have a considerably easier time attracting more investors to your hedge fund or your business.

Now don’t expect online reputation management to be either cheap or easy. Traditional SEO is already an intensive and expensive process and online reputation management is roughly an order of magnitude harder, because ten search engine listings must be optimized instead of only one listing. You can try to do this in house, but if you are a hedge fund manager that his worth his salt, you are probably better served by looking for an online reputation management service provided by a well regarded SEO firm, and sticking to what you do best which is extracting alpha from the markets.

Overcoming Your Fear of Rejection When Seeking Accredited Investors

Most people, including potential hedge fund managers have an innate fear of rejection. From an evolutionary perspective this fear seems to make a lot of sense. Get rejected by the tribe and you don’t pass on your genes and your lineage is wiped out.

But in the modern world, the fear of rejection can hold you back when starting a hedge fund. Unless you have people tripping over each other to give you their capital, you are going to have to talk to a lot of prospective investors to raise the funds that you need to launch your hedge fund, and the majority of them are going to say no.

You can let your fear of rejection hold you back or you can learn to overcome it by doing the following things.

First, make it your goal to get rejected by a certain number of prospective accredited investors per day. This completely reframes the problem from one of trying to avoid rejection to one of almost seeking rejection and not caring so much about it. When your goal is to avoid rejection you will end up making fewer calls on investors so that the chance of being rejected is lower. But when you are actively seeking rejection, you will be focused on making more calls. And as you get better at pitching your hedge fund you will find that you have to make more and more calls to reach your rejection quota.

Second, start small. Don’t pitch the $20 billion hedge fund that you have been salivating over on the first day. Start by pitching a number of small investors first. Focus on the prospects that you are a little more care free about first. If you land them, great, but if you don’t its no big deal. This way your fear of rejection is lower and you will have time to practice and refine your pitch.

Third, do the thing you fear everyday. If you fear being rejected by potential investors, you have to pitch your hedge fund to new prospects everyday. Your mindset toward selling your fund is like a muscle. The more you exercise it, the stronger it gets, until eventually you almost start to look forward to being rejected, because each rejection is a step closer to more capital for your hedge fund.

Fourth, another important mindset to have is that you can’t lose what you don’t possess. If a potential investor is not interested in investing, it is no loss. You never possessed their investment in the first place. So the way you entered the meeting is the way you left it. You haven’t lost anything, so don’t make their rejection to be a big loss. You’ve lost nothing except for a bit of time and you’ve actually gained something. You’ve gained a little more courage when meeting with investors that you can apply when you are meeting with a large pension fund or university endowment and you’ve learned a little more about things that may or may not work when pitching your fund.

Henry Ford once said:

Failure is the opportunity to begin again more intelligently.

Take this to heart. Review your last investment meeting. Evaluate what went right and what went wrong. Learn from each meeting and do more of what went right and less of what went wrong, and eventually you fill find that things start going right more often than they go wrong.

Fifth, learn to exit meetings gracefully. If a prospect has no desire to invest, do your best to learn why. Affirm that you accept their decision then ask them you tell you the reasons why they are not investing. Then listen carefully. Write everything down and use this to refine your pitch. This will take your mind off rejection and focus it on something that is much more constructive and beneficial to your fund raising efforts.

Sixth, replace the fear of rejection with a greater fear. Learn to fear regret more than rejection and your fear of approaching immense institutions will abate. Focus on the consequences of giving into your fear of rejection. Think of the millions of dollars that you will not be managing, the fees that you will not be earning, and the clients you will not be helping if you allow your fear of rejection to overwhelm you. Think of how you will regret not giving it your best in three years when you are forced to go back to work for someone else’s firm if you don’t face your fear of rejection and raise sufficient capital.

Remember, if you don’t learn to overcome your fear of rejection, your hedge fund won’t grow to its full potential. You might be the top hedge fund manager in the world, but people simply won’t know about it and they won’t invest in it. It is absolutely critical to face your fears, look them straight in the eye and overcome them to build a successful fund.

Distressed Debt Investing Interviews Ori Eyal
Eyal runs a global value fund and says most of his knowledge comes from studying Buffett

To paraphrase Embry: because every central bank in the world is printing money like Zimbabwe.

Li Lu might just be the next Warren Buffett. In the past few years he has posted some astonishing returns and Charlie Munger has given him a substantial portion of his personal fortune to manage. Here is a translation of his foreword to the Chinese translation of Poor Charlie’s Almanack.