Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

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"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

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Tuesday, 20 March 2012

Hedge funds (and the customers' yachts)

Hedge funds attract the brightest minds and finest fund managers.  Hedge fund rely on manager skill (known as ‘alpha’) to target better returns than you would get from simple market exposure (‘beta’).

Here are some of the strategies they use: long-short positions, statistical arbitrage, convertible arbitrage, distressed debt transactions, commodity trading, fixed income arbitrage, fund activism (buying a stake in a company then pestering management to act in their interests), merger arbitrage, directional macro trends…

In other words, they’ll do anything that gains an edge.

Disadvantages of hedge funds

Less regulation.  This can be a plus, of course, as funds are free to target great returns.  But also they may act irresponsibly – see ‘Madoff’ below.

Risk. In targeting big returns, hedge funds may gear up and bet the ranch on one of their ideas.  Great if it works (John Paulson made $15 billion for his fund betting on the subprime crisis and reportedly pocketed $3-4 billion himself).

Not so good when they make a wrong call though (cf. Bear Stearns who placed a major bet on bonds related to the mortgage market in 2007).

Fees. Like your super fund, a hedge fund will probably take a percentage of assets under management, but they will also take a performance fee.  A stonking performance fee in some cases – from 10% up to 40% of profits after an initial performance hurdle.


The Bernie “made-off” Madoff scandal saw investors lose out (Madoff managed money on behalf of some funds) when it transpired that the he was running a Ponzi scheme – incumbent investors were being paid using the funds of new entrants to the fund.

Would a smart and informed investor have avoided Madoff’s antics?  Maybe. 

Madoff used an unknown firm of auditors – a tiny, two-partner firm.  Major red flag for that.

He also seemed to have achieved the Holy Grail of high returns with suspiciously low volatility. Red flag.  And, in general, many sceptical Wall Street investors wouldn’t touch him.  Red flag.

But, investors would have told you in the early years that Madoff’s fund was great.  So you could well have been caught out.

Some investors diversify the risk by buying a fund of funds (where a manager allocates your capital across a range of hedge funds), but then, isn’t this just adding yet another tier of fees in to the equation?


A hedge fund sceptic might ask you to remember the old joke:

A hedge fund CEO takes a 12 year old boy down to the harbour and says: “And this, lad, is where our managers moor their yachts!”

Boy: “Cool.  Where are the customers’ yachts?”