December 21, 2015
What we’re reading this week
JP Morgan Chase recently settled a shareholder lawsuit related to the “London Whale” trades to the tune of $150 million. Here’s the running tally on the London Whale debacle: $6.2 billion lost from the trades themselves, $920 million in fines to U.S. and U.K regulators and now $150 million to shareholders (and shareholders’ attorneys). Ironically, this all comes out of shareholder pockets. You have to appreciate that.
The SEC is finally making (or thinking of making) some changes to the accredited investor limits. For the uninitiated, an “accredited investor” is someone who makes $200k a year or has $1 million dollars. There are then, special, “fancy” investments available to them that are not available to everyone else. The premise being (I think) that if you have a bunch of money (sort of) then you can afford to make stupid investments or that if you have accumulated some wealth then are you are less likely to make a stupid investment (feel free to read between the lines regarding how I feel about investments available to accredited investors). Neither assumption is great as people with a million dollars still can’t really afford to lose it and people with lots of money still do dumb things with said money. Either way, the rules are outdated and could use some revisions. My favorite proposal is that the SEC introduce a “test” you need to pass in order to be “accredited.”
Hedge fund, BlueCrest announced that they have “decided to return all outside money to focus on managing the wealth of its founder Michael Platt and other staff.” This is not a big departure as they were already running an internal fund for its staff in addition to its funds for outside investors. Not surprising, the internal fund was outperforming the outside funds:
BlueCrest International was down by 0.17 per cent at the start of this month, following a 0.1 per cent gain in 2014 and a loss of 1.56 per cent in 2013, net of fees.
One person familiar with the BSMA internal fund, which does not charge the same “2 and 20” fees as its public equivalent, said that it was up by “about 60 per cent” over three years, placing it among the best performing hedge funds in the world over that period. BlueCrest declined to comment.
That isn’t great for investors but does speak to a common sentiment in this industry. If you know how to invest money, you should invest your own money in a way that maximizes returns and invest other people’s money in a way that maximizes fees.
Matt Levine of Bloomberg’s Money Stuff puts it nicely: “Strategy 1 is, like, buy stuff that will go up. Strategy 2, though, probably implies that you should scale up your fund and raise your fees until you have captured for yourself all of the alpha that you can generate. If you read that model extremely literally, you’ll end up making 60 percent on your internal hedge fund and basically nothing on your external one.” Yup
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