A conceit of the private equity industry is that taking companies out of the public markets allows managers to focus on longer-term strategies. But on Tuesday, a Moody's report contradicted that claim too. Private equity "does not really invest over a longer term horizon than public companies…" said the report. "They're taking capital out over a short period of time, providing themselves with a dividend in the first three years…"
Meanwhile, according to figures from Credit Suisse Tremont, the data provider, the average hedge fund across all strategies has returned 7.86% over the year to date - almost exactly the same as the performance of the S&P 500 index.
And a recent S&P study of Absolute Return Funds - funds designed to outperform the benchmarks - showed that none of them hit their targets, after fees. The worst in the group, Baring's Directional Global Bond fund, hoped to produce 4% over the London Inter-Bank Lending Rate, net of charges, thanks to elaborate use of derivatives. Heisenberg himself probably would have been proud to call the funds' formulae his own, so complex were they. But despite the highest rates in the business, what the fund delivered over the last 12 months was a net loss of almost 6%. Of the 21 funds tracked by S&P, only four beat the rate of return an investor could have gotten from cash - without paying any fees at all.
Both in theory and in practice, an investor would have to be a moron to want to pay a hedge fund "2 and 20" for the privilege of getting ordinary returns (actually, many funds charge an additional 1% management fee…plus an additional 10% of performance as a commission…bringing the total to '3 and 30'). But a man who was looking for idiots in the investment markets of 2007 is spoiled for choice. He might as well be trying to identify the dumbest member of the British parliament or the fattest American tourist.
But the financial world, circa 2007, is full of wonders. Who could have imagined that professional investors would buy leveraged packages of mortgages made to people who lied about their incomes and were unlikely to be able to pay the money back? Or that shareholders would allow their companies to be loaded up with debt, stripped of assets, and used to pay huge "dividends" to the private equity marauders?
And now, who would have imagined that those same public shareholders would buy shares from Henry Kravis, Stephen Schwarzman, and other private equity hustlers? What do they think, that they are going to put one over on the very geniuses who made such suckers of them?"
Bill Bonner, The Daily Reckoning 14 July 2007
