6 Rules to protect you from a crooked hedge-fund.
- Sep 01, 2005
- admin
- Investing
WHAT THE HECK EVER HAPPENED TO GARY COOPER?
The kind of guy who faced down his responsibilities like a man.
The kind of guy who knows what the “right thing” is and does it.
The kind of guy who doesn’t cry to Dr. Friggin Phil just because
daddy didn’t hug him when he was young.
Those are the first thoughts that popped into my mind this week
when I heard about what happened at hedge fund Bayou Management
LLC.
Let me explain:
Several months ago Bayou Management mailed a letter to investors
saying it was closing up shop and returning the $400 million
it had under management.
Bayou founder Samuel Israel III told his investors that he
wanted to spend more time with his family.
Fair enough.
But there was only one small problem – there was no $400 million
left.
It had disappeared. Gone with the Wind. See ya later.
What the cops found instead of the cash was a note.
A suicide note.
It was on the desk of the Chief Financial Officer Dan Marino
(no, not the football player).
The note, like all corny suicide notes, started with:
“THIS IS MY SUICIDE NOTE AND CONFESSION…”
It went on to detail how the firm had defrauded investors since
1998 and how Dan, the C.F.O. had been abused – sometimes
physically – by the founder of the firm Samuel Israel.
It seems that Dan Marino actually helped commit fraud because
he didn’t have the nerve to stand up to his big mean boss or
come clean back in 98.
Had he stood up and did the RIGHT THING many people wouldn’t
have lost their money!
But it wasn’t even the suicide note that pissed me off.
What pissed me off was that Dan didn’t do it.
Nope, Dan didn’t fall on his sword. He wimped out of that too.
Instead, he was found alive and well sipping tea in his Armani
robe at his $3.5 million dollar mansion in Connecticut.
The latest thief to rob Americans who have to fight through bad
bosses and traffic just to provide a better life for their kids
didn’t even have the nerve to do the deed.
Boy does this country need Gary Cooper.
We need some people that know how and when to fall on their
swords when they mess up big time.
Back in the Roman days when people messed up badly they begged
for the chance to fall on their swords.
You may be thinking to yourself that I’m being insensitive.
According to Doctor Phil you’d be right.
But aren’t you just sick to your stomach of people doing bad
things to good people, apologizing and then having a “spiritual
awakening” on national television.
Just so you don’t have to find out what it’s like to run into
goons like this I’ve created 6 Rules that you should follow
to help you detect any potential danger when looking at hedge
fund investments:
THE DAN MARINO RULES TO RED FLAGGING BAD HEDGE FUNDS
RULE #1: Never forget that Wall Street is all about eliminating
conflicts of interest.
What I mean by this is that make sure that any hedge fund you invest
has an independent accounting firm AND executes its trades through
an UNAFFILIATED brokerage firm.
In the case of Bayou, good old Dan was the accountant of the
“independent” accounting firm and was also a head of the
brokerage firm they used to execute trades.
RULE #2: Consult the marketing materials for references.
In the marketing materials sent out by the fund it was said that
Samuel Israel, the founder of Bayou, was a big shot at Omega Advisors.
Omega Advisors, the hedge fund family run by billionaire Leon
Cooperman,is a big deal.
But the reality is that Samuel was just a low level guy at Omega. He
didn’t have trading authority at all. In fact, he barely worked at the
firm for one year.
When I got my first job at McDonalds the manager checked my references
better than the people who invested in this.
Lesson – always check references.
RULE #3: People who come from wealthy families can be criminals also.
Just because somebody comes from wealthy family doesn’t mean they’re
not criminals. In fact, during my career on Wall Street, I met plenty
of trust fund kids who were big degenerates.
What I learned was that they had all kinds of pressure to impress their
families and sometimes would do whatever it took to win daddy’s
approval.
RULE #4: Average returns do not mean “true” returns.
Most people equate financial fraud with outrageous claims. If you
see returns of 100% per year for ten years in a row generally you
notice it’s a fraud.
But these guys were a bit smarter than that. The marketing materials
they used showed “above average returns” that seemed reasonable.
Just like a wolf in sheep’s clothing.
RULE #5: Beware of discounted fees.
Hedge funds are generally compensated by the 2/20 rule.
2% of assets under management and 20% of the profits.
We all like bargains.
But when a hedge fund says it’s not taking any management fees ask
the person how he’s able to pay for that fancy office of his.
RULE #6: Beware of excessive flash (the P.T. Barnum Rule)
As a rule, people who need to show off with excessive jewelry or
brag too much scare me.
A penny saved is a penny earned. Low cost operators are generally
experienced businesspeople that know what it’s like to survive
economic cycles.
What really count are the basic things. Match minds, not wallets…
Send me all your hate mail….
–By Dylan Jovine