Among the newcomers was a man who had already been successful in the mutual-fund business, Warren Buffett. Buffett started his hedge fund in 1966. He put up $100 of his own money and raised another $105,000. In a short time, he had made a profit of $22,000 and was well on the way to becoming a millionaire. Today his fund has $22 million in assets, which makes it one of the largest hedge funds in existence. Buffett is one of the few hedge-fund managers who beat the market last year, but he is not entirely happy with his own performance. He is, however, an example of what has been happening in the hedge funds. The most recent SEC estimates indicate that there may now be as many as 200 of them in operation, with a total of $1.5 billion in assets under management.
What has happened to the hedge funds is interesting, but it is difficult to draw any conclusions from it. The troubles of the funds, however, suggest that they are not the sure things they once seemed to be. It may be that the hedge-fund managers have been too aggressive, or that they have been too greedy. It may be that the funds have simply grown too large to be managed effectively. Or it may be that the market has changed in some fundamental way that makes the hedge funds less attractive. Whatever the reason, it is clear that the hedge funds are not the investment vehicles they once were.
For the moment, at least, the future of the hedge funds is uncertain. Some investors are pulling their money out of the funds, while others are putting more in. Some managers are closing their funds, while others are opening new ones. Some are changing their investment strategies, while others are sticking to their guns. And the SEC is watching all of this with interest, ready to step in if it sees fit. The only thing that is certain is that the hedge funds will continue to be a force in the market, for better or for worse.
As for Warren Buffett, he remains confident in his ability to beat the market. He believes that his fund will continue to perform well, despite the challenges it faces. And he is not alone in his optimism. Many investors still believe in the hedge funds, despite their recent troubles. They see them as a way to make money in a market that is becoming increasingly difficult to navigate. And they are willing to take the risk, in the hope of achieving the kind of returns that only the hedge funds can provide.
Only time will tell if the hedge funds can live up to their promise. But for now, they remain an intriguing and enigmatic part of the investment landscape. And for investors like Warren Buffett, they continue to offer the possibility of great rewards, as well as great risks.
There are also a good number of professional investors among the limited partners, many of them working out of Wall Street. A considerable number of these pros manage their own investment partnerships, but because it is hard for anyone to be sure of all the partnerships around, there is no way to tell how this might affect the numbers or the composition of the funds. The best estimate is that the pros represent around 1,000 of the total of 3,000 limited partners.
Individual investors, many of them wealthy, count heavily among the limited partners. Some of these people have been investing in hedge funds for years; others have only recently discovered them. Some are men who have been successful in other businesses — such as Louis Wolfson, the financier who is currently fighting off the SEC — and others have been successful in the securities business. There are a good number of women among the individual investors, many of them widows or divorcees who once had their investments run for them by a trust department of a bank or by an investment counsel. These people have become interested in the hedge funds for a variety of reasons, but the most important one seems to be the desire for a more aggressive investment approach than they have been getting elsewhere.
At the same time, many of the people who have been investing in hedge funds for years feel that the funds have changed and, in some cases, not for the better. For one thing, they say, the funds have become overloaded with money, so that they have had to turn away substantial sums. For another, there are now some funds that are run by men who have no experience in money management. In fact, there are a few funds that have been started by men who have never had any experience at all in the securities business. For these reasons and others, a considerable number of the oldtimers have taken out their money and, in many cases, put it into some other hedge fund.
There is another group of investors who have also taken their money out of hedge funds and put it into other hedge funds — but for a different reason. They are the speculators. These people were drawn to the funds by the chance to make quick money, and in many cases they did. But speculators have a tendency to get in late and out early, and when the going got rough, they got out. The hedge funds, for the most part, did not do very well in 1966. The typical fund was down around 20%. Some did much worse. For instance, one fund, which had been heavily long, lost a quarter of its capital in a single day. Even the best funds were off around 10%, which was a poor showing compared with the 13% gain in the Dow-Jones industrial average.
Meanwhile, the SEC has been doing a lot of talking about the hedge funds. Its chief worry is that the funds will get into trouble and that, because they are so unregulated, the public will be hurt. The SEC has already taken a number of steps to control the situation, but the steps have been pretty minor. The SEC has asked the funds to provide some information about themselves, such as their names and the names of the general partners. The SEC has also asked the funds to provide some information about their operations, such as their investment policies and their financial condition. In addition, the SEC has asked the funds to provide some information about their performance, such as their rates of return and the extent of their leverage. But the funds haven’t had to provide very much information, and they haven’t had to provide it very often.
Some of the funds have been cooperative, but others have not. This has led to some tension between the SEC and the funds. Some of the funds have even gone so far as to sue the SEC, claiming that the information it was demanding was proprietary. The SEC backed off in some of these cases, but it is still trying to get more information from the funds. One way it might do this is to take the funds to court. But this is a long and costly process, and the SEC is not sure that it wants to do it. It is still talking to the funds, trying to get them to provide more information on a voluntary basis.
Meanwhile, the funds are going about their business as usual. They are buying and selling stocks, and they are making money. Some of them are doing very well indeed. But the question is, can they continue to do well? There are a number of people who think not. They think that the funds have grown too big, that they have taken on too much risk, and that they are headed for a fall. But there are others who think that the funds will continue to prosper, that they will adapt to the changing investment climate, and that they will come out ahead. The only thing that is certain is that the hedge funds will continue to be a source of fascination and controversy for some time to come.
By the end of 1969, A. W. Jones & Co. had lost all the gains of the preceding three years and then some. Its shareholders were down about 25 percent for the year, while Jones himself, who had made a big bet with his own money in his funds, was down 35 percent. This meant a loss of more than $1 million on Jones’s investment, almost as much as he had made during the fat years. The market action of the past year, he now believes, has taught him a lesson that he should have learned a long time ago — namely, that the best time to sell is when you can, not when you have to.
At the same time, Jones remains a firm believer in the hedge-fund concept. Over the years, he has watched the performance of his own fund and of others and he is convinced that the hedge concept is a sound one. He thinks the problem lies not in the concept but in the execution. “If you are going to manage a hedge fund — or any other kind of fund — you have to have a lot of experience and you have to be right most of the time,” he says. “And that’s very difficult.” The lesson of 1969, he feels, is that “you can’t be right most of the time.” He is now managing his funds with more caution and he has been emphasizing to his investors that they must be prepared to take the rough with the smooth.
As for the investors in Jones’s funds, they are, by and large, sticking with him. In the fall, he did have some redemptions, but they were few in number and small in amount. The investors who are staying with him seem to be doing so out of loyalty — and because they are convinced in their own minds that Jones has learned his lesson and won’t make the same mistakes again. And some, like the investor who has lost the most money with him, have said flatly, “I can’t afford to sell out now. I can’t take the loss.”
Whether the loyalty will be rewarded remains to be seen. The first quarter of 1970 has been a good one for the stock market, and A. W. Jones & Co. has also done well. But Jones knows that he can’t afford to be euphoric at sixty-nine — or at any other age. In his opinion, the only way to run a hedge fund is with the knowledge that it is a high-risk business and that the market can be an unpredictable place. As he puts it, “You have to be an optimist to run a fund like this, but you can’t be a Pollyanna. You have to be prepared for the worst.”
With that admonition, Jones goes back to his desk to prepare for another day in the market, another day of watching and waiting, another day of hoping that he and his investors will come out on top.
Jones’s commitment to hedging remains steadfast, despite the challenges faced by hedge funds in 1969. While some investors may question the value of short selling in a down market, Jones and his fund managers believe that hedging is essential for maintaining a balanced and aggressive investment strategy. Despite the difficulties faced in the past year, Jones and his team are determined to learn from their mistakes and improve their approach to hedging in the future. Their dedication to the hedge fund concept remains unwavering, as they believe it is crucial for long-term success in the volatile world of finance. One area of concern for the SEC is the possibility of fraud in the hedge fund industry. The recent collapse of the Douglas Financial Corporation, a hedge fund that turned out to be a massive Ponzi scheme, has only added fuel to the fire. The fallout from the Douglas affair has been significant, with many investors losing substantial amounts of money.
The SEC is now considering implementing stricter regulations for hedge funds in order to protect investors from such schemes in the future. This could include increased disclosure requirements, more stringent oversight, and potentially even limits on the types of investments that hedge funds can make.
Overall, the hedge fund industry is at a crossroads. The successes of funds like Buffett Partnership, Ltd. are being overshadowed by the failures of others. As the market becomes increasingly volatile, investors will need to carefully consider where they place their money in order to avoid being caught up in the next big financial disaster.
Another possibility the SEC is exploring is to classify hedge funds as investment advisers. The Investment Advisers Act of 1940 requires registration of investment advisers who manage more than $25 million in client assets. Hedge funds frequently surpass this threshold, and if classified as investment advisers, they would need to register with the SEC. This would give the Commission oversight of their activities and require them to adhere to certain rules and regulations designed to protect investors.
Regardless of which route the SEC ultimately takes, it is clear that the Commission is determined to bring hedge funds under its regulatory umbrella. The increasing size and influence of these funds, coupled with concerns about their impact on the market and potential misuse of inside information, have led the SEC to believe that oversight is necessary. As the investigation and legal proceedings continue, the future of hedge funds and their relationship with regulatory bodies like the SEC remains uncertain. But one thing is certain – the days of operating in the shadows may be numbered for these once secretive investment vehicles.
Kisah ini sebenarnya ditampilkan di Fortune.com
Pengacara untuk dana lindung nilai menggelengkan kepala dan mengatakan bahwa semuanya konyol, tetapi mereka juga mengatakan ada hal-hal yang lebih buruk yang bisa terjadi pada dana lindung nilai. Mungkin, jika itu akan membuat SEC menjauh dari mereka, kata seorang pengacara baru-baru ini, dana lindung nilai seharusnya mengaku sebagai dealer, meskipun mereka tentu bukan jenis itu. Apa yang dikatakan Henry IV? ‘Paris layak sebuah misa.’
Dalam istilah dana lindung nilai, Paris adalah 20 persen dari keuntungan yang diberikan kepada mitra umum, dan jika ini mengikuti jalur lain yang terbuka untuknya, Paris mungkin saja hilang. Jalur ini akan membuat Komisi mengklaim bahwa mitra umum sebenarnya adalah penasihat investasi,” sebuah istilah yang, menurut Undang-Undang Penasihat Investasi tahun 1940, berlaku untuk setiap orang yang, sebagai imbalan, terlibat dalam bisnis memberikan saran kepada orang lain [mengenai investasi mereka]. Staf SEC berpendapat bahwa siapa pun yang mengelola uang secara discretionary, seperti mitra umum dari dana lindung nilai jelas-jelas lakukan, tak terelakkan juga memberikan saran kepada investor ini.
Bahkan pengacara dana lindung nilai merasa sulit menyerang argumen ini, tetapi mereka telah mencoba. Mereka mengatakan sejumlah kemitraan investasi ada ketika Undang-Undang Penasihat disahkan, namun hukum mengabaikan keberadaan mereka. Mereka juga mengatakan bahwa kewajiban tanpa batas yang diemban mitra umum dalam sebuah kemitraan terbatas, dan modal yang biasanya mereka sumbangkan ke dalamnya membuat mereka lebih dari sekadar penasihat. Terakhir, mereka menunjuk pada klausa dalam undang-undang yang memberikan pengecualian untuk setiap penasihat dengan empat belas klien atau kurang dari pendaftaran; bahkan jika mitra umum adalah penasihat, kata pengacara mereka, klien mereka bukan mitra terbatas sebagai individu melainkan dana sebagai entitas tunggal. Dengan kata lain, mereka tidak memiliki jumlah klien yang memerlukan mereka untuk mendaftar.
Menyasar angsa
Seluruh argumen ini memiliki nuansa putus asa bagi mitra umum, karena mereka tidak dapat mentolerir pendaftaran sebagai penasihat investasi. Undang-Undang Penasihat melarang segala jenis pengaturan kompensasi yang terkait dengan hasil yang dicapai penasihat dengan uang klien. Larangan ini ditulis dalam undang-undang untuk mencegah spekulasi, karena SEC pada saat itu percaya – dan, secara umum, masih percaya – bahwa penasihat akan cenderung mengambil risiko berlebih dengan uang klien mereka jika mereka mengharapkan mendapatkan bagian dari keuntungan, namun pada saat yang sama terbebas dari segala tanggung jawab atas kerugian. Dapat diperdebatkan bahwa larangan ini menghancurkan insentif penasihat, dan oleh karena itu tidak bijaksana, atau setidaknya, terlalu menyeluruh. Namun, larangan tersebut ada dan, dalam hal dana lindung nilai, pasti mengancam untuk membunuh angsa yang bertelur telur emas.
Jika SEC sekarang berencana untuk mengubah pikirannya menjadi tindakan, dan memberi tahu manajer dana lindung nilai negara ini bahwa mereka mulai hari ini akan diidentifikasi sebagai penasihat investasi, sebagian besar masih tidak akan mendaftar di bawah undang-undang. Sebaliknya, mereka akan segera mengubah dana lindung nilainya menjadi perusahaan investasi terdaftar. Dengan demikian, mereka akan menjadikan dana mereka tunduk pada beberapa aturan pembatasan mengenai penjualan pendek dan leverage, dan, yang paling menyedihkan dari semua, akan kehilangan keuntungan pajak yang mengagumkan yang berlaku untuk kemitraan. Namun, dana terdaftar diizinkan untuk beroperasi dengan biaya kinerja, dan dengan demikian manajer dapat menyelamatkan beberapa karakteristik dari kehidupan lama mereka.
Sulit untuk mengatakan apa yang akan dilakukan SEC, dan bahkan sulit untuk membentuk pendapat tentang apa yang seharusnya dilakukan. Mungkin dana lindung nilai pantas diatur dengan cara tertentu, tetapi apakah mereka harus dirusak adalah pertanyaan lain. Jika investor kaya dan berpengalaman ingin membayar 20 persen dari keuntungan mereka untuk manajemen investasi – atau, seperti yang diungkapkan oleh seorang investor yang kecewa, cukup bodoh untuk membayar 20 persen – maka mungkin seharusnya mereka diizinkan melakukannya. Bagaimanapun juga, mungkin setelah 1969, tidak begitu banyak yang akan berada dalam suasana hati yang begitu murah hati. Karena seperti yang diketahui setiap manajer dana lindung nilai, tanpa produk yang bagus dengan harga yang baik, Anda tidak akan jauh di pasar.