Tuesday, March 14, 2017

Buffet and The $1 Million bet

Protégé Partners has likely found itself on the losing end of a $1 million bet with Berkshire Hathaway chairman Warren Buffett after a group of hedge funds it selected failed to beat a Vanguard Group index fund for almost a decade.

The outcome of the wager, which concludes at the end of this year, is the latest reminder of the momentum that low-cost passive investing has gained since the financial crisis. Investors have increasingly favored index funds, which track benchmarks, over paying higher fees to money managers who make active picks in the stock and bond markets.

Buffett, a billionaire investor and outspoken critic of fund managers who profit from high fees at the expense of their clients, bet in 2007 that a Vanguard S&P 500 index fund would beat five funds of hedge funds selected by Protégé Partners over the next 10 years. Buffett laid out evidence in his 2017 annual letter to Berkshire Hathaway shareholders that he’s set to win the wager as none of the funds outperformed the index fund from 2008 through 2016.

Jeffrey Tarrant, founder and CEO of Protégé Partners, an asset manager based in New York, didn’t immediately return a phone call seeking comment.

The $3 trillion hedge fund industry, which has been struggling to outperform stock and bond markets, could see assets shrink by as much as 30 percent in the next three years if performance continues to disappoint, according to a report this month from Boston Consulting Group. By contrast, Vanguard, whose name is synonymous with index funds, attracted more money from investors in 2016 than all mutual funds and exchange-traded funds combined, preliminary data from Morningstar earlier this month showed.

“Though there are thousands of professional investment managers who have amassed staggering fortunes by touting their stock-selecting prowess, only one man — Ted Seides — stepped up to my challenge,” Buffet said in his letter, signed Feb. 25. So If you also want to have an edge on Investing you could also use a Percentage Calculator.

Seides was then co-manager of Protégé Partners, a fund-of-funds firm that focuses on emerging hedge fund managers. The Oracle of Omaha said in his letter that the five funds Seides selected had invested their money in more than 100 hedge funds, which meant the results wouldn’t be “distorted” by the performance of a single manager.

“I hadn’t known Ted before our wager, but I like him and admire his willingness to put his money where his mouth was,” Buffett said. “He has been both straight-forward with me and meticulous in supplying all the data that both he and I have needed to monitor the bet.”
Seides, who left Protégé in 2015 and is now a managing partner at Hidden Brook Investments, said in an email that he couldn’t comment on the bet because technically it belongs to Protégé.

According to Buffett, the five funds-of-funds gained 2.2 percent on an compounded annual basis in the nine years through 2016. “That means $1 million invested in those funds would have gained $220,000,” he said. “The index fund would meanwhile have gained $854,000.”

Under terms of the wager, the winnings will go to a charity. Buffet said the performance of the funds of hedge funds leaves “no doubt that Girls Inc. of Omaha, the charitable beneficiary I designated to get any bet winnings I earned, will be the organization eagerly opening the mail next January.”

Thursday, February 23, 2017

"Black Edge" Biggest Insider-Trading Scandal in Wall Street

Every trader needs an edge, but not all edges are created equal. Recently I got in contact with Sheelah Kolhatkar, and agreed to write an article on her latest book. It is a must read! it gives a clear perspective on the use of Information while trading and we all know that in the Investing and trading scene, one of the most powerful edges is information. At SAC Capital, Jason Karp color coded information to teach his analysts "what was safe and what might be illegal." The white edge was "readily available information" - completely safe but not worth much. The gray edge might be (and probably was) material, nonpublic information. At SAC, the only way to be sure it wouldn't get the firm into trouble was to talk to its legal counsel, something few traders were eager to do. So gray slid into white. Black edge information was obviously illegal. Karp warned his analysts: "If you do one thing wrong, you're in jail and your life is ruined. There is no trade that's ever worth it." So check your Investment goals carefully with this ACalculator and the end of the second post for more Info
And yet. As one trader, asked if he knew of any fund that didn't traffic in inside information, answered: "No, they would never survive." The author adds: "In this way, black edge is like doping in elite-level cycling or steroids in professional baseball. Once the top cyclists and home-run hitters started doing it, you either went along with them or you lost."
   Agreement with Sheelah to write this post.      
Sheelah Kolhatkar's Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street (Random House, 2017) chronicles the government's ultimately disappointing effort to build a case of insider trading against the legendary Steven A. Cohen of SAC Capital. The story, extensively reported at the time, transfixed the hedge fund world and financial news junkies. A lot of people were cheering for the government.
Kolhatkar, a staff writer for The New Yorker and author of the widely discussed article "What If Women Ran Wall Street?", worked as a risk arbitrage analyst at two hedge funds before becoming a journalist. For this book, she relied not only on published press sources but on "hundreds of interviews with more than two hundred people, as well as voluminous court transcripts, exhibits, deposition testimony, SEC interview notes, notes taken by FBI agents during witness interviews …, diary entries, written correspondence, and other documents." Predictably, Cohen refused to be interviewed.