Bloomberg's strangest headline of the day, "It's Time to Meet the Subprime Devil We Don't Know: Caroline Baum"

Is this perhaps a slightly awkward headline? I always figured she was perfectly nice. (Just kidding now.)

Seriously, she has a very substantial point: Is the lack of transparency which goes with certain investments such as some mortgage-backed securities, sufficient to make it very difficult to evaluate the risks present in the financial markets? Sufficient to render problematical proper evaluation of the risk present in heavily-leveraged, quantitatively-driven portfolios of such investments? Evidently.

Sufficient even perhaps to alter the "riskiness", i.e., volatility, of even other asset classes? In the short run, apparently. Did Stephen King ever write anything as scary as that?


Bloomberg.com

Index Universe: Hedge Fund Index Debacle

Good discussion of the problem of hedge fund indexes and their "numbers". Failures such as the most recent, not including the Bear Stearns funds' numbers, which were sort of, well, you know, hard to put together, is not the the only problem. The author, Matthew Hougan suggests that even when there is no gross breakdown in such an index, the performance numbers are not going to be exactly "real-time" in nature, but have something of a "serial correlation" issue. As my daughter might perhaps say, "Ewww".


Breaking News - Hedge Fund Index Debacle

Bear Stearns Investors Await Tally on Losses -- WSJ

This is ugly: "Investors in two Bear Stearns hedge funds will have to wait until as late as July 16 to learn how much money they have lost." That's to learn what the damage is so far. It did not say that is what they will receive back, or when that will be. As I noted last week, investors in these funds could be said to be locked in like steerage passengers on the Titanic.

Uglier: "Investors are watching the process closely because they believe that other hedge funds also are holding thinly traded mortgage-related securities, and they want to see how far Bear thinks their value has fallen."

And who is invested in all these funds? Pension funds, seeking juiced returns from the large-brained super-traders at the hedge funds. Accredited investors, who are soooo sophisticated. Right. They bought these things. Investors in hedge funds-of-funds, who may not necessarily be accredited investors. Caveat emptor.

Readers of John Mauldin's weekly e-letter got a good bit of detail on the attempted auction by Merrill Lynch of the some of the portfolio holdings of the Bear Stearns funds. No bids on much that was offered. Really ugly. Mauldin's e-letter is free, always good in that it's well written and he actually must be large-brained, not that I agree with all or even most of his conclusions, and viewable on his site, but you have to register. Here's the site.


Bear Stearns Investors Await Tally on Losses - WSJ.com

New Yorker: Hedge Clipping - get above-market returns on the cheap? "FundCreator"

Remarkable article. A few good quotes:

"Funds of funds hold stakes in a variety of hedge funds, so they are somewhat safer. However, as the executive made clear to Kat, investing in them is costly."

"...people who invest in funds of funds are effectively paying a three-per-cent management fee plus a “success fee” of thirty per cent 'three and thirty.' ”

“ 'Who wants to pay that kind of money?' Kat asked the executive who was interviewing him. 'You can’t seriously expect there to be anything interesting left after somebody takes out three and thirty.' The executive was nonplussed. 'I don’t know,' he said. 'But they pay it.' ”

So Mr. Kat sets out to craft a program to replicate specific hedge funds, such as George Soros' Quantum Fund NV. This is where it gets interesting.


The World of Business: Hedge Clipping: Reporting & Essays: The New Yorker