Carl from Chicago

Business executive interested in history, economics, taxation and energy policy.

Hedge Fund Blues

by

Barrons\' Hedge Funds

The hedge fund industry is coming under close scrutiny for a variety of reasons. In fact, it seems like that bad news doesn’t stop.

– Madoff runs a giant Ponzi scheme that claims up to $50 billion in losses. The exact amounts will be different because some of the “losses” represent paper profits on statements that he sent to customers that were phantom but assuredly they are large and painful
– Worse than this scheme was the fact that so many “fund of funds” or hedge funds that are comprised of investments in other hedge funds charged a big fee for the right to invest in this fund in the first place. Gulp
– Many funds that claimed they were “hedged” against market moves (where the “hedge” in hedge funds comes from) most assuredly were not; large losses of 40% or more are common in the listings, and some very big names have been seriously bruised

More subtle than these obvious issues are the fact that these hedge funds often have “high water” provisions. Funds typically make money by charging an annual fee of 2% a year and 20% of profits. However, if the fund declines in value, the hedge fund can’t charge the 20% fee on profits until after the old “high water” mark in value is reached. Thus if your fund was down 25% this year, you have to gain 33% before you can start earning your 20% cut again. On top of the “high water” issue, if your asset base drops 40% (remember those losses, above) then you are only making 2% on 60% of your former assets.

Read more

Municipal Bonds… and Illinois

by

Illinois Bond Sale

MUNICIPAL BONDS

A difficulty with finance is that statistics are all backwards-looking. For instance, there were umpteen articles about how stocks “return x% over y number of years” or that “residential real estate is a solid investment based on returns in area x over y number of years”. We all know how those assumptions turned out.

While research is useful and assumptions need to be made, a crucial error that has lead to much of our financial malaise is due to retaining assumptions too long rather than chucking them aside when the underlying facts on the ground change. You also need to be aware of shifts in sentiment and try to anticipate what is going to happen next.

Specifically, municipal bonds have historically had a low default rate, less than 1%. And when they do default, investors generally have a relatively high “recovery percentage” (as opposed to Lehman when creditors received 7 cents on every dollar owed). Many investors view them as almost as safe as the debt of the Federal government. Municipal bonds are (generally) tax-free, so a municipal bond can have a lower debt coupon and still attract as many investors as a tax-adjusted amount from a corporate bond sale. I am generally speaking of general obligation debt, not the revenue bonds that might be tied to corporations or other initiatives (these carry a higher coupon and default rate).

Read more

Anywhere Else Likely A Drive Off…

by

As I was walking at Grand and LaSalle today doing some Christmas shopping the guy next to me pointed out something in the snow right next to us. It was the nozzle from a gas station that someone had apparently driven off with and which ended up here. If you look in the picture to the upper right you can see the BP gas station from whence it came…

Drive Off Nozzle

Weirdly enough, what I thought of immediately was not that someone absently drove off with that nozzle still attached to their gas tank, nor that they stole the gas and drove away in haste, but that they (might have) drove off with that nozzle still attached in fear from attack from aggressive vagrants.

River North is a very wealthy area of Chicago, but since we are near downtown and filled with (well meaning) tourists, our neighborhood is filled with the homeless, bums and panhandlers. Here is a helpful schematic post that I created to identify their various types. That BP gas station is notorious – I won’t go there at all if I can possibly avoid it, because they so aggressively try to pump your gas for you and you can’t really get away from them if you have to stand there while your tank is filling.

The situation was documented when an off duty policeman was stabbed by a homeless person while filling his gas tank at that very station. Here is a link to a story about that stabbing. You’d figure that an off duty policeman is likely to be an intimidating figure, so it would be much worse if you were a woman or elderly.

Or it could have been a drive off, or someone who is absent minded. Either way I’d recommend that you find a different gas station.

iBonds Update

by

Here is an article about iBonds, which are inflation-protected securities that you can buy from the US Government online that are fully guaranteed. iBonds right now are yielding over 5% because of higher inflation; this could always change in the future. Read more if you are interested.

Recently I have been writing about investing in secure securities (i.e. where you can’t lose money, except in extremely unlikely scenarios). I focused on purchasing CD’s that are insured by the FDIC and constructing a “ladder” of varying maturities through your brokerage account. The return on these CD’s is much higher than is currently being offered by US Treasury securities and has other advantages such as convenience and simplification of statements.

There is another form of safe investing that is easy to do and risk-free (assuming the US Government does not collapse). This is called an “I Savings Bond” or “iBond”.

Read more

Montana-Bahn

by


There is a comment thread here Chicago Boyz responding to my post on Chicago drivers tearing down the left lane of I290. Someone asked if there was any experience about the experiment of unlimited speeds in Montana (they do have limits at night).

I… uh… found this photo on the internet of someone driving quickly in Montana. Rumor has it that there are many wide open spaces where you can see far ahead and the flat landscape means that there is no where for authorities to find you, should they care to do so.

There are speed limits at night and these are taken seriously; there is an amazing amount of wild life in parts of Montana and you do not want to hit them with your car at high speed.