Hedge funds have a fee structure called two and twenty. Two percent on the capital invested, and twenty percent on the profits they earn on the assets in which the capital is invested. That means that the returns have to be really good before investors get something themselves.
Many investors are getting a negative return, meaning that they’d be better off with the money stuffed in a mattress. The hedge fund managers are earning fortunes, but it seems that’s still not enough.
Two recent studies have found that the hedge funds are adjusting their figures subsequent to the initial announcement. What at first looks like good accounting is, on closer examination, just another way of gauging from investors.
Some of the prior adjustments are downwards, and that happens a lot in cases where the fund needs to be above its previous highest valuation before performance fees are earned. By reducing earlier figures, the performance target is lower.
The others, not constrained by the performance target, and that revise their figures upwards do so to look better for prospective investors.
The research found that investors who chose an adjustment of the earlier figures as an immediate trigger to sell out of the fund outperformed those who stayed invested by a considerable 3.3%.
And hedge fund managers wonder why their popularity is at an all time low?
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JPMorgan has just announced that its hedging losses that CEO Jamie Dimon had previously said were a “tempest in a teapot” are now $5.8 billion, up $3.8 billion from the previous announcement. “At most” he says, “any additional losses will be limited to another $1,7 billion from the bad credit trades.”
Happily, all this bad news coincides with what would have been the bank’s best quarter ever. The announced earnings per share (EPS) of $1.21 compares well with the previous record of $1.34 earned in Q1/2007. The effect of the hedging losses taken in the second quarter are $0.69. So without that extraordinary trading loss, the EPS would have been a record $1.90. Now that’s a happy coincidence.
After making the announcement of the increased loss and the quarterly profit JPMorgan’s shares rose by almost 6%.
Now we do know that in the next quarter there’s going to be another charge of up to $1.7 billion. But, if these numbers are real, then in the quarter after that, the business is going to be very profitable.
So the share price should have jumped a lot more.
Perhaps there are other people who are a little skeptical about the numbers.
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When one looks at a balance sheet, the value of the business attributable to the shareholders is the difference between the assets and the liabilities, the net asset value (NAV). The market value (MV) of a listed company is the value attributable to the shareholders. For companies that are growing, profitable, and high-tech the MV is usually a lot higher than the NAV.
A large proportion of the difference is a function of the growth, and when that starts to drop off, even though the company is still very profitable, the MV drops.
So the senior executives cannot afford for growth to drop off, otherwise the shareholders lose money and that makes them unhappy.
High growth is normal in the early stages of a market. The same is true for a company with a smart idea coming into an established market. As the market becomes saturated and the smart company starts to dominate, growth naturally tails off. After that growth is dependent on price increases, which at some point starts to chase customers away.
When executives start running out of ideas to keep the growth going they sometimes resort to dishonesty.
There have been a few examples recently: Barclays and the other banks manipulating LIBOR. GlaxoSmithKline paying $3 billion fine for committing healthcare fraud.
One company’s growth falling off is an unhappy event. Many companies sharing that fate is a crash. That mythical wealth is what underpins the stock markets. As long as we keep believing the myth, we’ll be fine.
Just don’t stop.
What Is the Difference Between the NYSE & NASDAQ in Terms of Market Capitalization of Stocks?
Corporate arrogance should be punished
LIBOR manipulated – that’s a really big deal!
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Bob Diamond, the CEO of Barclays, has resigned. Now he is claiming that he is being penalized for owning up first.
Perhaps he should revisit some of the other things he has said in the last few days. For example, that Barclays had acted as soon as senior management were aware of the manipulation. Now it appears that Mr Diamond was aware of the manipulation as early as 2008, and that he believed that Barclays was operating under instruction from Paul Tucker, deputy governor of the Bank of England. The conflicting stories suggest that Mr Diamond has not yet realized that lying is what caused this problem in the first place.
Barclays is being brought to book, but another large corporate is quietly slipping under the radar.
Wyndham hotels allowed hundreds of thousands of hotel customers’credit card details to be stolen from their computer systems in at least three breaches. The most basic security measures were not followed. The critical data was not encrypted. On a modern database encrypting the data is a matter of ticking a box.
Their defense: “They were unaware of any customers losing money as a result of the breach”.
Anyone who has had the experience of being defrauded will know that the perpetrators aren’t very communicative about where they obtained the credit card details. When it happened to me, my card had only ever been used for five transactions, none of them online. It wasn’t possible to figure out which purchase had exposed me to the fraud.
The lack of concern for customers is evidenced by the carelessness. That’s bad enough, but it’s their arrogance that deserves to be punished.
What did Bank of England say to Barclays about Libor?
The elusive truth about Barclays’ lie
Diamond Pays Penalty For Being First Mover In Libor Probe
Wyndham hotels face FTC complaint after multi-hack attacks
A spook speaks
Since this was originally published:
Banks are different from other business. Money is their stock in trade. A big part of the huge profits that they make is the difference between the interest that they charge (their income) and the interest that they pay (their cost).
The banks dishonestly adjusted the interest that they pay by manipulating LIBOR. The system of setting LIBOR, simply canvassing the banks by asking them what rates they were paying, with no checks and balances, opened it up for manipulation.
The traders who are responsible for working in the derivatives market worth $554 trillion in 2011 (37 times U.S. GDP) are not supposed to communicate with the people being canvassed for the LIBOR rate. They did. The traders asked their colleagues to manipulate the figures submitted for LIBOR, and the response was a positive “done for you big boy“.
Barclays has just been fined $93 million by the UK’s FSA and $450 million by the U.S. DoJ after owning up. Now they face law-suits from the people they ripped-off, which will certainly amount to a lot more. The time frame of the “crime” – 2005 to 2009. The FSA and DoJ may have settled for too little.
Barclays are not the only ones. Other banks are being investigated.
Watch this spot.
Q&A: Barclays and bank rates
Barclays Bank PLC Admits Misconduct Related to Submissions for the London Interbank Offered Rate and the Euro Interbank Offered Rate and Agrees to Pay $160 Million Penalty
Barclays fined for attempts to manipulate Libor rates
Barclays ‘attempted to manipulate interest rates’
More banks face interest rate rigging investigation
‘Systematic dishonesty’ at Barclays, says former boss
Q&A: Barclays and bank rates
Inter-bank interest rates Cleaning up LIBOR
The LIBOR probes An expensive smoking gun
Inter-bank interest rates Fixing LIBOR
BANKERS GONE WILD