CALDEIRÃO DE BOLSA

While most hedge funds probably don't operate in such a nakedly self-serving way, the underlying logic of Oz's strategy is quite common: take a position that yields high returns with high probability and extremely poor returns with low probability, and keep your fingers crossed. Credit default swaps are one example, so are bets on interest rate spreads. Such strategies are risky but not fraudulent; the manager can always argue that his opinion about the odds differed from the market odds (he was simply engaging in arbitrage).

Eliminating such scams through regulation is not going to be easy due to the unusual nature of the product. Yet, some steps toward protecting investors can -- and should -- be taken.

All hedge funds should be required to register as soon as they are established and to report their returns on a regular basis. Such tracking would allow potential investors to study the records. New rules could also require managers to keep investors apprised of the fund's downside exposure. Alternatively managers could guarantee that losses not exceed a certain level, similar to a car manufacturer offering a warranty.

Although individual hedge fund managers may drag their feet, it is actually in the industry's best interest to encourage greater regulation and transparency. Otherwise, a rising tide of failed funds could cause a collapse in investor confidence, putting both the good and the bad wizards out of business.

Next Oz writes some covered options on this event and sells 110 million of them in the derivatives market. This obligates him to pay the option holders $110 million if the event does occur and nothing if it does not. He collects $11 million on the options. To cover his obligations in case the 'bad' event occurs, he uses the investors' money plus the proceeds from the options to buy $110 million in one-year Treasury bills yielding 4 percent, which he deposits in escrow. This leaves $1 million in "pocket money," which he uses to lease some computer terminals and hire a few geeks to sit in front of them, just in case his investors drop by.

The probability is ninety percent that the bad event does not occur and Oz owes nothing to the option holders. With a gross return (before expenses) of $15,400,000, the investors are thrilled, and so is Oz. He collects $2 million in management fees (of which he has only spent $1 million), plus a performance bonus equal to 20 percent of the 'excess return', namely, 20 percent of $11,400,000. All in all, Oz nets over $3 million for doing absolutely nothing.

Oz can then repeat the same gambit next year. When the fund terminates after five years, the chances are nearly 60 percent that the unlucky event will never have occurred. Oz looks like a genius and gets paid like a genius.

Hedge funds are risky for another reason. It is extremely difficult to tell, based on past performance, whether a fund is being run by true financial wizards, by no-talent managers who happen to get lucky or by outright scam artists.

To illustrate how easy it is to set up a hedge fund scam, consider the following example. An enterprising man named Oz sets up a new fund with the stated aim of earning 10 percent in excess of some benchmark rate of return, say 4 percent. The fund will run for five years, and investors can cash out at the end of each year if they wish. The fee is the standard '2 and 20': 2 percent annually for funds under management, and a 20 percent incentive fee for returns that exceed the benchmark.

Although he has no investment track record, Oz has a smooth manner, a doctorate in physics and many rich acquaintances. He raises $100 million and opens shop. He then studies the derivatives market and finds an event on which the market places fairly long odds, say 9:1. In other words, it costs $.10 to buy an option that pays $1 if the event occurs and $0 otherwise. The nature of the event is unimportant: it might be a large fall in the stock market, Florida getting hit by a Category 5 hurricane or Russian President Vladimir Putin dying before the end of the year.

Atomez Escreveu:Embora lá fazer um!

Como diria Sir Jeremy Clarkson -- how hard can it be?

Step 7. Hire a good P.R. person!
It’s a long road to your first billion. But when you get there, watch your back!

Actual big-shot hedge-fund manager’s tip: “When you have over a billion dollars at least, that’s when people start shooting at you. There’s so much Schadenfreude out there that you’ll need Schadenfreude-defense. But remember—that’s way down the line.”

Once you’ve successfully navigated all these steps, celebrate in pre-2008 style: build a Suffolk County house that eats up 90 percent of your lot’s footprint; marry that yoga instructor; or, best yet, exploit every campaign-finance loophole to underwrite a slate of candidates who will repeal the Obama-nomics overhaul bill of 2010.

Step 6. Check into your very own hedge-fund hotel!

Even though you’re going rogue, you still need a proper office to look respectable and legit. And guess what? The very same investment houses that serve as prime brokers almost invariably have unused office suites—“hedge-fund hotels”—that are just waiting to have their reception areas emblazoned with your fund’s logo.

Actual big-shot hedge-fund manager’s tip: “They might provide you with low-cost rent. There are lots of little hedge funds trying to make their start, and the brokers will agree to a month-to-month lease.”

Quico Escreveu:Esta técnica de colocar um artigo interessante "às pinguinhas" num fórum é excelente. Como as novelas. Não custa nada ler e mantém o interesse aceso. É muito melhor despejar toneladas de parágrafos de uma só vez, que depois ninguém vai ler.

Fico à espera do próximo episódio.

Step 5. Get a prime broker!

When you buy a stock, that transaction needs to be recorded somewhere. Your prime broker is like your custodian. It clears your trades for you. Walk around to Goldman Sachs, Morgan Stanley, or Deutsche Bank—or maybe Bank of America.

Actual big-shot hedge-fund manager’s tip: “Probably Goldman is still the best. Remember: When you start, you’re walking upright but weighed down by the seeder, the prime broker, and your own team—they’ll all want equity, of course—and it’s a real slog. But once you’ve got your seed and your documents in order, you’re ready for business.”

Step 4. Get that anchor capital!
You need your first assets under management (A.U.M.) to get your fund off the ground. But you most likely don’t have deep pockets yourself, and that damned Madoff has discredited the formerly effective inscrutable-Zen-warrior passive-aggressive approach to investor solicitation. So your best bet is to find a “seeder” to put up the anchor capital. Warning: This can be excruciating.

Actual big-shot hedge-fund manager’s tip: “The nasty world of seed investing is one step up from human trafficking. They try to own a piece of you: ‘I’ll give you $25 million, but I own 40 percent of your company.’ It’s similar to the ‘pimp-and-ho’ model: they put the money into you, and you’ve gotta go work the street. One of the best seeders is a company called Reservoir.”

Step 3. Hire a law firm!
You’ll need a good firm to incorporate your fund—first in Delaware, and then offshore in either the Caymans or the British Virgin Islands. But beware of big, sprawling, white-shoe corporate law firms that overcharge. Instead, go with the specialists who do this thing all the time.

Actual big-shot hedge-fund manager’s tip: “The Coke and Pepsi of the business are Schulte, Roth & Zabel and Akin, Gump, Strauss, Hauer & Feld. Avoid the high-tone and really big firms. They are too expensive and they don’t know what they’re talking about with funds. They’re too busy billing Pfizer millions upon millions to file their 10-K forms.”

Step 2. Name your fund!
Let’s face it: aggressive, testosterone-redolent names (e.g., Hungry Wolf Capital, Thor Hammer Fund, Tomahawk Capital Management) are as passé as Meatpacking District mega-restaurants and conspicuous luxury boxes at the stadium. Come off as attuned to the times with something gentle and/or arboreal (e.g., Sassafras Group, Bending Birch Asset Management, Larchwood Partners).

Actual big-shot hedge-fund manager’s tip: “The goal is to project sturdiness without rapaciousness. You don’t want to be Three-Headed-Dog-Guarding-the-Gates-of-Hades Capital. And you don’t want to use your own name. Typically, guys use streets and towns from their childhoods. Or a tree, to convey strength and deep roots.”

Financial regulatory reform cramping your style? Go rogue with VF.com’s step-by-step action plan.
By Keenan Mayo


If you’ve spent the last 5, 10, or 20 years enjoying the fruits of a blissfully unregulated financial system that created wealth for its adepts but nothing for the American people, then surely you’re steamed at the big regulatory overhaul that passed in Congress this summer. But there’s still something you can do: move over from the stringently monitored world of banking to the somewhat less monitored world of hedge funds. We spoke to an actual big-shot hedge-fund manager to pick up tips on how you too can start the rogue finance shop of your dreams.

Step 1: Create a hedge-fund team!
The bare essentials to get your new fund going: two junior analysts, a junior trader, and a chief financial officer. When you “spin off” from your current bank, it’s crucial to steal away some crack subordinates. A big selling point to potential investors is that you have a well-oiled, cohesive unit with a history of “crushing it.”

Actual big-shot hedge-fund manager’s tip: “Choose people who have a nose for ferreting out opportunities, but who are not willing to cut your guts out and try to replace you. You need junior-level people.” (...)