<p>[Harvard</a> Is Buying Dividend Stocks – Should You? | InvestorPlace](<a href=“http://www.investorplace.com/2011/11/harvard-buying-dividend-stocks-and-equities/]Harvard”>Harvard Is Buying Dividend Stocks -- Should You? | InvestorPlace)</p>
<p>Liking Harvard more and more. Maybe Harvard will lead endowments back off the cliff and restore sanity to the management of endowments.</p>
<p>[Yale</a> upholds commitment to private equity | Yale Daily News](<a href=“http://www.yaledailynews.com/news/2011/nov/30/yale-upholds-commitment-to-private-equity/]Yale”>http://www.yaledailynews.com/news/2011/nov/30/yale-upholds-commitment-to-private-equity/)</p>
<p>Recognizes real reason why Yale is so heavy into PE-because exits are far less than calls for money and they would have to sell on the secondary market where the “true” value of these investments will be exposed. Wouldn’t be surprised to see Yale back borrowing money again soon.</p>
<p>[SEC</a> to analyse private equity valuations - FT.com](<a href=“Subscribe to read | Financial Times”>Subscribe to read | Financial Times)</p>
<p>This will make many PE and Hedge fund firms and many endowments plenty nervous if the SEC really is serious about this</p>
<p><a href=“http://dealbook.nytimes.com/2011/12/01/new-s-e-c-tactics-yields-actions-against-hedge-funds/[/url]”>http://dealbook.nytimes.com/2011/12/01/new-s-e-c-tactics-yields-actions-against-hedge-funds/</a></p>
<p>Wesleyan’s new CIO, has only been in office less than a year so. Add the fact that she is a protege of Yale’s David Swensen, at a time when private equity is dirty word, and you’d have to be an eternal optimist to expect her to knock one out of the ballpark. But, the latest Financial Statement which covers the period ending, June 30, 2011, suggests otherwise:</p>
<p>1) A 17% increase in endowment market value (from $513 million to $601 million)
2) A 20% return on investment (gross increase in market value prior to application to operating expenses)
3) No increase in debt.
4) An actual increase in the value of so-called Level Three investments (whether this is due to positive returns on liquidations or to increased investments is hard to tell)
<a href=“http://www.wesleyan.edu/finance/financeDept/reporting/Annual%20Financial%20Reports/2010-2011.pdf[/url]”>http://www.wesleyan.edu/finance/financeDept/reporting/Annual%20Financial%20Reports/2010-2011.pdf</a></p>
<p>For more information on Wesleyan’s new CIO, here is an article published shortly after she took the helm:
[aiCIO</a> - Interrogation: Anne Martin Thinks Liquidity Is Key](<a href=“http://www.ai-cio.com/channel/ASSET_ALLOCATION/Interrogation__Anne_Martin_Thinks_Liquidity_Is_Key.html]aiCIO”>http://www.ai-cio.com/channel/ASSET_ALLOCATION/Interrogation__Anne_Martin_Thinks_Liquidity_Is_Key.html)</p>
<p>Sm74…thanks for the links…</p>
<p>If you can trade and maintain a cash balance on the down markets, I imagine you could do ok. Someone made some $$ if they bought 2 weeks ago and sold Friday today. Some funds close their year in Oct, Nov, or Dec.</p>
<p>[If</a> You’re Not A Hedge Fund Investor, You Probably Did Better In 2011 Than Those Who Are](<a href=“http://www.businessinsider.com/hedge-funds-challenge-the-faithful-2011-12]If”>If You're Not a Hedge Fund Investor, You Probably Did Better in 2011 Than Those Who Are)</p>
<p>Cuts thru the BS about “absolute return” and “hedge fund”- like many other financial instruments the name is no more than a bogus selling technique. There is no hedge in hedge fund and there is no absolute return in absolute return. All just a way to grab 2% management fee and 20% of profits and take huge risks. Says hedge funds have underperformed a 60%/40% mix of stocks and bonds for " 9 CONSECUTIVE YEARS".</p>
<p>sm74:
What are the legal “requirements” to be labelled a “Hedge Fund”?
What are the “benefits”: tax-wise, comp-wise, client-wise, otherwise?</p>
<p>Mom, because Hedge funds sell to institutional and high net worth investors there are not alot of restrictions on what they can do compared to mutual funds.</p>
<p>Like mutual funds hedge funds do alot of different types of investing and they are laid out in their prospectus. Wall Street guys want to run hedge funds because along with PE that is where the big bucks are. The typical formula is a management fee of 2% and on top of that 20% of the profits. That compares to average mutual fund fee of 1% and no profit, and at the bottom range of cost something like a Vanguard index fund that has a fee of .1%.</p>
<p>The pay formula drives the way hedge funds invest which typically means that they take more concentrated and risky bets. In the stock market this means concentrated bets on high flying stocks( a popular stock has been Netflix which has gone from 60 up to 300 and back to 60 in a year). Because one piece of news can have a dramatic impact that is why you are seeing so many Hedge Fund managers convicted of insider trading. They desperately need that information to beat the market.</p>
<p>I dont know of any tax or other benefits to hedge funds. Normally they are more liquid than PE but even that has changed. Yale reports that of its 12 hedge funds 8 have put in place blocks on investors getting their money out. Whenever you see that that is a big time red flag. There are a ton of bad actors in the hedge fund industry-investing in it is not for the faint of heart.</p>
<p>Couple of today’s articles make you scratch your head and wonder why anyone would invest in hedge funds–lower return and higher risk not exactly a winning formula.</p>
<p><a href=“http://money.cnn.com/2011/12/05/markets/hedge_funds_pensions/index.htm[/url]”>http://money.cnn.com/2011/12/05/markets/hedge_funds_pensions/index.htm</a></p>
<p><a href=“http://www.reuters.com/article/2011/12/05/us-hedgefunds-paulson-idUSTRE7B42NB20111205[/url]”>http://www.reuters.com/article/2011/12/05/us-hedgefunds-paulson-idUSTRE7B42NB20111205</a></p>
<p>Hedge fund is simply financial “slang” for an investment fund (partnership) that is exempt from the investment company act of 1940. Therefor it is not subject to the rules governing mutual funds (investment companies).</p>
<p>This exemption means that hedge funds can do (broadly speaking) whatever they wish in terms of setting compensation terms, and in choosing investments.</p>
<p>The reason this is allowed is that to be exempt from the investment act, you have to restrict yourself in the number of investors you have, and they all must meet criteria for essentially being rich. The idea behind it is that rich investors do not need the “protections” of the investment company act. </p>
<p>Hedge funds are not necessarily “hedged”. In fact, most are simply long or short whatever they are investing in.</p>
<p>There are no tax benefits to hedge funds. They are taxed just the same as everyone else, despite the lies you hear on the news, and from some others. The compensation benefits are obvious, as sm74 notes. If you are running a mutual fund, you are prohibited under the investment company act from taking a performance-based fee. It has to be a fixed fee or percentage of assets. Hedge funds can be compensated by receiving a % of the gains. Since a lot of their income is capital gains (when they achieve them) a lot of their income is taxed at capital gains rates. This is the so-called “carried interest”, which refers to the normally 20% share the fund keeps of the investor gains. Naturally its taxed at capital gains rates…short if short-term, and long if long-term. No mystery there.</p>
<p>Mutual funds have borrowing restrictions. Hedge funds do not. They can leverage up, assuming there is a lender to let them do it. </p>
<p>Some of the laws have changed somewhat, I believe, and I’m not up on all of them. Client wise, you simply agree with your clients on what you’re going to do . Since they presumably went over this with you when they invested, there shouldn’t be a problem.</p>
<p>Hedge funds aren’t new. Buffets partnership was a hedge fund before he “distributed the assets” in the form of Berkshire Hathaway and closed the fund. George Soros’ Quantum fund where he made most of his money was a hedge fund.</p>
<p>[Moody?s</a> Calls Bubble-Era LBOs’ Performance “Lackluster” - Private Equity Beat - WSJ](<a href=“http://blogs.wsj.com/privateequity/2011/12/07/moody’s-calls-bubble-era-lbos-performance-lackluster/]Moody?s”>http://blogs.wsj.com/privateequity/2011/12/07/moody’s-calls-bubble-era-lbos-performance-lackluster/)</p>
<p>“lackluster” is certainly generous-I would have used another term. A large percentage of endowment money is tied up in these 2006-08 PE funds that are having a seriously difficult time figuring out how to cash out and return money to the endowments.</p>
<p>Here’s what I don’t understand: when some of these highly illiquid endowment funds (Yale and progeny) report total returns of 19%, what do they really reflect? the relatively tiny amounts they still have invested in equities?</p>
<p>The 19% return you cite reflects a combination of the public return from the 20% liquid tier 1 and 2 assets, combined with the return reported by the managers of the other 80% tier 3 assets. For example, in Yale’s annual report they stated that in the last year there were $2.8B in gains on their tier 3 assets, however $2.2B of those gains were unrealized gains-gains estimated by the PE and Hedge Fund managers. So, in essence, the value of these endowments heavily into tier 3 assets like Yale are almost totally dependent on the accuracy and integrity of the people who manage and get incentive fees for managing the assets.
Ofcourse, we have no reason to question the integrity of the people in the hedge fund and private equity industries.</p>
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<p>Well, this is misleading, at best. I’m no tax expert, but as I understand it most hedge fund managers take their hefty fees in the form of shares in the hedge fund. Instead of income, this is classified as an “investment” with a cost basis of zero. If the manager holds the shares for a year or more before cashing out, it’s treated as a long-term capital gain and taxed at 15%, rather than the normal income tax rate of 35%. But it’s not really an investment, it’s income earned for performing a service. If I see my doctor on a fee-for-service basis, that fee is income to my doctor, and taxed accordingly at a 35% marginal rate. If I pay my lawyer for drafting a new will, that fee is income to my lawyer, and taxed accordingly at a 35% marginal rate. But when the hedge fund manager charges his client 20% of the client’s gains for the service of managing the client’s money, tax law entertains the fiction that the fee is not a fee-for-service and therefore not income to the fund manager, but instead an investment by the fund manager (an “investment” that didn’t cost the manager anything), to be taxed eventually at the 15% long-term capital gains rate. But as long as the manager holds rather than sells, there’s no taxable event at all. Even though the manager clearly got compensated handsomely for performing a service, and is undisputably financially better off for it. And some of these guys are raking in literally billions this way, while paying taxes at a much lower rate than you or I pay. John Paulson, a hedge fund manager in New York, reportedly made $4.9 billion (yes, billion with a “b”) last year managing other people’s money, and for all we know has yet to pay a dime of taxes on it as long as he’s holding it as shares in his hedge fund. Or if he did cash out some of his shares, he likely paid tax at a 15% rate.</p>
<p>[CVC’s</a> $2.7 billion refinancing of Nine fails: sources | Reuters](<a href=“http://www.reuters.com/article/2011/12/08/us-nine-cvc-idUSTRE7B70BG20111208?feedType=RSS&feedName=innovationNews&sp=true]CVC’s”>http://www.reuters.com/article/2011/12/08/us-nine-cvc-idUSTRE7B70BG20111208?feedType=RSS&feedName=innovationNews&sp=true)</p>
<p>Multi-billion dollar PE write-offs from the 2006-08 boom and bust like this one are now beginning to be realized. Getting much harder to re-finance and recapitalize these dogs. Bad news for PE firms and their investors.</p>
<p>All investors are taxed only on capital gains that are realized. If a hedge fund buys stocks that appreciate dramatically every year, and if they never sell any of them until they are liquidated, then no income taxes will be due from anyone (except for other unrelated items like the 2% management fee, which will be paid at ordinary tax rates). </p>
<p>This is precisely the same as any other investor. If I buy Apple and it goes to 10,000 a share, I don’t have to pay any capital gains taxes until I sell it. </p>
<p>*You can be sure that the IRS would be taxing this income at the highest possible rates if they could. Its obvious that they cannot. *</p>
<p>The IRS is quite familiar already with allocating one person’s income to another’s tax return. If you begin saving for your child, and if his income rises to the level where he has to file a return, his investment income is attributed to his parents (for the sole reason that the IRS wants to take as much money as possible from every taxpayer). But so far they haven’t tried to call a childs capital gain ordinary income for the parents.</p>
<p>I stand by my comment that there are no tax benefits to hedge funds. </p>
<p>OF course, there is (currently) an advantage to having all of your income be from capital gains. But that is a completely different argument that can be had separately from all of the false reporting that persuades people that there is a magic section of the tax code reserved for the wealthy. </p>
<p>The more appropriate gripe would be that institutions are stupidly putting assets with hedge funds and paying excessive fees for suspect performance. Buffett has said that exact thing several times in his letters. And linking back to the endowments issue, I believe that the institutions will be very sorry that they are so tied up in partnerships that are so hard to exit.</p>
<p>[S.E.C</a>. Looks at Harbinger’s Dealings With Goldman - NYTimes.com](<a href=“http://dealbook.nytimes.com/2011/12/09/s-e-c-examines-harbingers-dealings-with-goldman/]S.E.C”>S.E.C. Looks at Harbinger's Dealings With Goldman - The New York Times)</p>
<p>Speaking of bad actors, this “Harvard” man is a real piece of work.</p>
<p>[More</a> than 90% of buyout investors set to refuse to reinvest](<a href=“http://www.efinancialnews.com/story/2011-12-12/coller-fundraising-investors]More”>http://www.efinancialnews.com/story/2011-12-12/coller-fundraising-investors)</p>
<p>Next to last paragraph very revealing. 57% of investors in Private Equity feel that they own “Zombie” funds. What is a zombie fund. When you committ money to a PE fund they have complete control over that money for typically 10 years. In addition to handing over that money the investor(endowment) has to pay a 2% management fee on your committment every year for 10 years on uncommitted money and invested money where exits haven’t taken place yet. A zombie fund basically is just milking that 2% fee, they have no hopes of generating enough of a profit to get to the 20% profit participation so all the PE funds efforts are directed at milking their 2% management fee as long as they can. Selling investments and returning cash to the investors reduces the management fee so there is no incentive for the PE firms to sell.</p>
<p>Now a PE firm will say their incentive to go ahead and sell investments is that they need to keep their investors(endowments) happy to get them to invest with them again. Problem is a true zombie fund knows that their investments are in such bad shape that if they did sell them the return would be so bad that no-one in their right mind would give them money again anyway. A ton of zombie funds out there-sad thing is for example if you are running a $5billion fund that is $100million a year you are raking in for 10 years so who cares if the endowment doesn’t want to give you more money.</p>
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<p>I’m a bit distant from this stuff. Are you saying that HYP and others have to pony up a 2% management fee on “commitments” that they agreed to invest, but have not yet invested? Surely this cannot be the case? ?</p>
<p>Yes, that’s how it works. Presumably, the PE firms need that money to do due diligence on potential investments. The other thing you have to remember is going back to 2006-08 investors were begging PE firms to allow them to give them money to invest. PE firms took full advantage of that and basically wrote up the rules where they win regardless of how bad a job they do. Only now with investments going bad are investors(endowments) realizing just how bad the incentives are that are built into the PE system.</p>