With Risk Comes Reward, And Risk

Hedge funds have been getting a ton of notoriety lately because of their gigantic returns and people are going nuts over them and their fantastic returns. The short description of a hedge fund is that a limited number of individuals (accredited investors) are allowed to invest in a hedge fund and, because they are open only to accredited investors, they aren’t regulated by anyone such as the SEC. As such, they are basically free to invest whatever they want (subject to whatever agreements they made with investors) and they’re paid based on asset size and performance and they’re paid very handsomely. They’re generally riskier than a mutual fund but usually you don’t care because you want the rewards.

With risk, comes reward. And for the poor souls who invested in Bear Stearns’ High-Grade Structured Credit Enhanced Leveraged Fund and High-Grade Structured Credit Fund, they were told last week that they done. Finished. The High-Grade Structured Credit Enhanced Leveraged Fund was now worthless, losing essentially all $638 million, and the High-Grade Structured Credit Fund lost 91% of its $925 million – all because they were highly leveraged in the sub-prime lending industry. For those of you keeping score at home, that’s over $1.4 billion dollars lost. One point four billion dollars.

With risk comes reward… but don’t forget the risk.

Accredited Investor: In the US, for someone to be an accredited investor, they must satisfy some qualifications according to the Securities Act of 1933. The qualifications are that you must have net worth of $1M or have made at least $200k each of the last two years ($300k if you’re married) and can expect to earn that much this year.


Trading With the Enemy – Using Media to Pump Up Stocks?

I saw an interesting article (technically it’s a book review) on written by Robert Lenzner and Victoria Murphy and wanted to bring it to you folks to see what you thought. It was written three years ago but the book is interesting and the darkness it sheds light on is intriguing.

Basically they reviewed Trading With the Enemy: Seduction and Betrayal on Jim Cramer’s Wall Street by Nicholas Maier, a former employee of Cramer & Company. The book alleges that James Cramer used his own TV appearances and CNBC anchors to pump up stocks that his hedge fund would then dump, taking the gains the security made after the media attention. Maier says that Maria Bartiromo and David Faber were the two unwitting anchors who Cramer used in the scheme and they were eager to break stories, to no fault of their own because they’re reporting news, so the sham was easy to set-up.

A quote from Maier after Cramer went on TV to promote a great long-term investment: “Our real strategy, however, was all about taking profits now. Back at the office, we were supposed to dump stocks after a quick half-point gain. On TV, Jim would tout a stock we owned, but if it moved up, we would sell.” The book keeps on going with other schemes and plots used by Cramer & Co. I mean things like after-market orders on the hot 90s IPOs so they’d stay hot the next day were commonplace according to Maier. Since then, three pages from the book were removed, they accused Cramer of using insider information, and it was republished.

My own take? I’m sure these backroom type deals happen all the time just like I’m sure insider trading on tiny scales happens too. That’s just the nature of the markets and everyone will try to get an edge wherever they can. The SEC just needs to be diligent and make sure the egregious offences are taken care of. If I find this book in a library I’m going to pick it up but I doubt it’s worth buying a book on speculation and unsubstantiated accusations.

Any thoughts?

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