Played On The Street - Part 2

<body bgcolor="#E8FFF0"> <div align="left"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table16"> <tr> <td width="740"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" height="37" id="table17"> <tr> <td height="35" width="100%"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table18"> <tr> <td> <p align="center" class="header_green"><map name="FPMap4"> <area target="5" href="../../blog_071126_post.htm" shape="rect" coords="0, 0, 149, 29"> </map>Played On The Street - Part 2</td> </tr> </table> </td> </tr> <tr> <td width="100%" bgcolor="#CC9966" height="2"> <img border="0" src="../../../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td width="0%" valign="top" bgcolor="#FFFFCC"> <table border="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table19"> <tr> <td align="left" valign="top" bgcolor="#E8FFF0"> <p class="blog_body" align="center"> November 26, 2007  <font size="2"> <a target="_top" href="http://www.glynholton.com/link/blog_071126.htm">permalink</a></font>  <a target="5" href="../../blog_071126_post.htm"> comment</a>  <a href="mailto:glyn@contingencyanalysis.com?subject=Blog Feedback"> e-mail</a></td> </tr> </table> </td> </tr> </table> <p class="blog_body">Last week, I took the <i>Wall Street Journal</i> to task for publishing a "Heard on the Street" column that did little more than spread hedge fund industry hype. In that blog posting, I asked <i> Journal</i> staff to look into four questions related to the relevance and validity of the facts asserted in that column. </p> <p class="blog_body">On Saturday, the <i>Wall Street Journal</i> addressed the first of those four questions, publishing an article about how statistics related to the size and growth of the hedge fund industry are manipulated. Reporters Alistair MacDonald and Margot Patrick placed some phone calls and turned over a few rocks. Here is what crawled out: </p> <p class="blog_body">1. While it is standard practice for mutual funds and other investment funds to report their size in terms of investor capital, some hedge funds substitute assets for capital when reporting their size. With hedge funds routinely leveraging themselves ten times or more, this can make a $100 million fund appear to be a $1 billion fund. Call this approach to reporting what you want. I call it lying. </p> <p class="blog_body">2. With many investors looking to a fund's size as an indication of success, this misleading reporting might induce investors into a small fund by making them think they are investing in a large, successful fund. </p> <p class="blog_body">3. The misleading reporting inflates estimates of the industry's size and growth. Those estimates are blatantly unreliable. The <i>Journal</i> cites two disseminators of hedge fund propaganda: Hedge Fund Intelligence and Credit Suisse Tremont. One claims the hedge fund industry controls $2.48 trillion in capital. The other cites a number half as large. That is a pretty big discrepancy. </p> <p class="blog_body">4. There are other factors that can distort or bias such statistics. One is for double-counting of assets invested in hedge funds by funds of funds. The <i>Journal</i> mentions RAB Capital, plc. They have a fund of funds that invests about $500 million in the groups other hedge funds. The <i>Journal</i> doesn't even touch on the gaping conflict of interest here, but they do confirm that RAB double reports the assets to data distributors.</p> <p class="blog_body">I applaud the Journal for shining a light on a small fraction of what is unseemly about the hedge fund industry. But there is more work to be done. In my last blog posting, I asked three other questions that need to be addressed. There are a lot more rocks to turn over. </p> <p class="blog_body">We now know hedge funds are being creative when reporting their capital. On its own, this revelation is a drop in the bucket, but it contributes to a river of disturbing evidence. I suspect the hedge fund industry is a sham with consequences as far-reaching as the dot-com bubble seven years ago.</p> <p class="blog_body" align="center"> Glyn A. Holton</p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" height="37" id="table20"> <tr> <td height="35" width="100%"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table21"> <tr> <td width="100%"> <p align="center"> <img border="0" src="../images/button_comment.gif" usemap="#FPMap4" width="150" height="30"><p align="center"> </td> </tr> </table> </td> </tr> <tr> <td width="100%" bgcolor="#CC9966" height="2"> <img border="0" src="../../../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td width="0%" valign="top" bgcolor="#FFFFCC"> <table border="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" cellspacing="1" id="table22"> <tr> <td align="left" valign="top" bgcolor="#E8FFF0">  </td> </tr> </table> </td> </tr> </table> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table23"> <tr> <td bgcolor="#FFFFCC"> <table border="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" bgcolor="#E8FFF0" id="table24"> <tr> <td width="100%" bgcolor="#E8FFF0"> <p align="center" style="margin-top: 18"><map name="FPMap2"> <area target="_top" href="http://www.glynholton.com" shape="rect" coords="0, 0, 192, 76"> </map> <img border="0" src="../images/logo_blog_green.gif" width="193" height="77" usemap="#FPMap2"></p> <p align="center"><span class="verdana10"> <a href="http://www.riskglossary.com/main/disclaimer.htm" target="_self"> Disclaimer</a></span></p> <p align="center">website: <a target="_top" href="http://www.contingencyanalysis.com"> http://www.contingencyanalysis.com</a><br> blog direct link: <a target="_top" href="http://www.glynholton.com"> http://www.glynholton.com</a><br> copyright © Contingency Analysis, 2006 - current<p align="center"> <map name="FPMap3"> <area target="_top" href="http://www.contingencyanalysis.com" shape="rect" coords="0, 0, 240, 88"> </map> <img border="0" src="../images/logo_ca_green.gif" width="241" height="89" usemap="#FPMap3"></td> </tr> </table> </td> </tr> </table> </td> <td>  </td> </tr> </table> </div>  </body>