#Bubbles In Several #Housing Markets in #Europe - #Roubini

Bubbles In Several Housing Markets

Now, five years later, signs of frothiness, if not outright bubbles, are reappearing in housing markets in Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand, and, back for an encore, the UK (well, London). In emerging markets, bubbles are appearing in Hong Kong, Singapore, China, and Israel, and in major urban centers in Turkey, India, Indonesia, and Brazil.

Signs that home prices are entering bubble territory in these economies include fast-rising home prices, high and rising price-to-income ratios, and high levels of mortgage debt as a share of household debt. In most advanced economies, bubbles are being inflated by very low short- and long-term interest rates. Given anemic GDP growth, high unemployment, and low inflation, the wall of liquidity generated by conventional and unconventional monetary easing is driving up asset prices, starting with home prices. - Business Insider

Nouriel Roubini is an American economist. He teaches at New York University's Stern School of Business and is the chairman of Roubini Global Economics.

Nouriel Roubini Blog: Bubbles In Several Housing Markets

Since 1960 #juniors spent about $61 billion on #mining #exploration in Canada

Since 1960 juniors spent about $61 billion on exploration in Canada - 36 percent of the total exploration spend - and made about 45 percent of total discoveries

Junior vs. Senior - Discovery performance in charts

Mineweb.com EXPLORATION

We take a look junior performance in Canada, versus seniors, through research provided by Richard Schodde over at Minex Consulting.

Author: Kip Keen
Posted: Tuesday , 26 Nov 2013 HALIFAX, NS (MINEWEB) - 
In a recent presentation Richard Schodde over at Minex Consulting draws a striking picture of the performance of juniors and seniors in mineral exploration in Canada and abroad. We thought it worthwhile sharing a few of his graphs (with his permission) that draw a clear picture of the importance of juniors in the Canadian exploration scene.

 The summary statistic is this. Since 1960 juniors spent about $61 billion on exploration in Canada - 36 percent of the total exploration spend - and made about 45 percent of total discoveries, Schodde says.
Here we see the raw spending, seniors versus juniors:

In recent decades it's apparent that junior spending has skyrocketed, a fact that can in part be attributed to the increasing power of the personal computer. Bare bones companies, starting in the 1980s could compete with majors in the exploration game.
Discoveries followed the money:

We see that juniors made many of Canada's discoveries in recent decades, indeed, most of them in the past 10 years. Often exploration is a fruitless task, however. You spend money and find nothing and this is evident Schodde's overall ratio of total exploration spend to the value of discoveries. For juniors this was 0.89.
Typically, it's the rare, major discoveries that make for massive returns (though not only). This is evident in the next graph where Tier 1 discoveries - big ones - drive Schodde's estimates of discovery value far above what was spent. Juniors in the past decade have ruled this roost (yellow bars=value created, red line=spending) making most of the big discoveries.

Where do we go from here? Metal prices dominate the exploration cycle in Schodde's analysis (though there are other contributing factors) and he extrapolates future exploration spending in a variety of gold price scenarios. His general sentiment: the sky isn't falling. Taking $1,200 an ounce gold, he forecasts exploration spend to average about $1.3 billion a year in Canada in the coming years. That's well off 2012, a banner year. But historically speaking, it's still quite a healthy level.

Credit: Minex Consulting

Read the article online here:  Junior vs. Senior - Discovery performance in charts - EXPLORATION - Mineweb.com Mineweb

Rich families hoarding cash: Citi

Wealthy families have about 39 percent of their assets in cash

Rich families hoarding cash: Citi

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A new survey of family offices by Citi finds that the wealthy are cash heavy—meaning they may fall short of the investment returns they're expecting.
Wealthy families have about 39 percent of their assets in cash, according to a recent poll of more than 50 large family office representatives from 20 countries conducted by Citi Private Bank.
Stocks represented about 25 percent of portfolios on average. Bonds were about 17 percent of the asset mix and various classes of less liquid and alternative investments amounted to 19 percent.
"Using these weightings, our own return expectation for the portfolio … comes to just 4.4 percent. This matches what we at Citi Private Bank observe generally among high end investors: very high cash holdings, with a current asset allocation unlikely to achieve return targets," Steven Wieting, the bank's global chief investment strategist, wrote in a recent client note.

Read the whole article here:  Rich families hoarding cash: Citi


The Pangea Advisors Blog

#Coconut Crisis Looms as Postwar #Palm Trees Age: Southeast #Asia @Bloomberg

• world consumption of coconut products is growing more than 10 percent a year, production is increasing by only 2 percent

• The trees, many of which were planted about 50 to 60 years ago, no longer yield enough to meet rising demand

• The harvest in the Asia-Pacific is now about 40 nuts per tree a year, compared with a potential yield of 75 to 150, it estimates, saying replanting is advisable after 60 years.

• The global coconut area was about 12.3 million hectares (30.3 million acres), yielding 64.3 billion nuts

• Asia-Pacific accounts for about 85 percent of the global supply of the commodity that goes into food, fuel, soaps and cosmetics

See the whole article on Bloomberg:  Coconut Crisis Looms as Postwar Palm Trees Age: Southeast Asia - Bloomberg


The Pangea Advisors Blog

#Bubbles, Bubbles Everywhere | Mauldin Economics

The difference between genius and stupidity is that genius has its limits.

– Albert Einstein

Genius is a rising stock market.
– John Kenneth Galbraith

Any plan conceived in moderation must fail when circumstances are set in extremes.
– Prince Metternich

Bubbles, Bubbles Everywhere

You can almost feel it in the fall air (unless you are in the Southern Hemisphere). The froth and foam on markets of all shapes and sizes all over the world. It is an exhilarating feeling, and the pundits who populate the media outlets are bubbling over with it. There is nothing like a rising market to help lift our mood. Unless of course, as Prof. Kindleberger famously cautioned (see below), we are not participating in that rising market. Then we feel like losers. But what if the rising market is … a bubble? Are we smart enough to ride and then step aside before it bursts? Research says we all think that we are, yet we rarely demonstrate the actual ability.

This week we'll think about bubbles. Specifically, we'll have a look at part of the chapter on bubbles from my latest book, Code Red, which we launched last week. At the end of the letter, for your amusement, is a link to a short video of what you might hear if Jack Nicholson were playing the part of Ben Bernanke (or Janet Yellen?) on the witness stand, defending the extreme measures of central banks. A bit of a spoof, in good fun, but there is just enough there to make you wonder what if … and then smile. Economics can be so much fun if we let it.

I decided to use this part of the book when numerous references to bubbles popped into my inbox this week. When these bubbles finally burst, let no one exclaim that they were black swans, unforeseen events. Maybe because we have borne witness to so many crashes and bear markets in the past few decades, we have gotten better at discerning familiar patterns in the froth, reminiscent of past painful episodes.

Let me offer you three such bubble alerts that came my way today. The first is from my friend Doug Kass, who wrote:

I will address the issue of a stock market bubble next week, but here is a tease and fascinating piece of data: Since 1990, the P/E multiple of the S&P 500 has appreciated by about 2% a year; in 2013, the S&P's P/E has increased by 18%!

Then, from Jolly Olde London, comes one Toby Nangle, of Threadneedle Investments (you gotta love that name), who found the following chart, created a few years ago at the Bank of England. At least when Mervyn King was there they knew what they were doing. In looking at the chart, pay attention to the red line, which depicts real asset prices. As in they know they are creating a bubble in asset prices and are very aware of how it ends and proceed full speed ahead anyway. Damn those pesky torpedoes.

Toby remarks:

This is the only chart that I’ve found that outlines how an instigator of QE believes QE’s end will impact asset prices. The Bank of England published it in Q3 2011, and it tells the story of their expectation that while QE was in operation there would be a massive rise in real asset prices, but that this would dissipate and unwind over time, starting at the point at which the asset purchases were complete.

Oh, dear gods. Really? I can see my friends Nouriel Roubini or Marc Faber doing that chart, but the Bank of England? Really?!?

Then, continuing with our puckish thoughts, we look at stock market total margin debt (courtesy of those always puckish blokes at the Motley Fool). They wonder if, possibly, maybe, conceivably, perchance this is a warning sign?

And we won’t even go into the long list of stocks that are selling for large multiples, not of earnings but of SALES. As in dotcom-era valuations.

We make the case in Code Red that central banks are inflating bubbles everywhere, and that even though bubbles are unpredictable almost by definition, there are ways to benefit from them. So, without further ado, let’s look at what co-author Jonathan Tepper and I have to say about bubbles in Chapter 9.

Easy Money Will Lead to Bubbles and How to Profit from Them

Every year, the Darwin Awards are given out to honor fools who kill themselves accidentally and remove themselves from the human gene pool. The 2009 Award went to two bank robbers. The robbers figured they would use dynamite to get into a bank. They packed large quantities of dynamite by the ATM machine at a bank in Dinant, Belgium.…

Read the rest of the piece here:  Bubbles, Bubbles Everywhere | Thoughts from the Frontline Investment Newsletter | Mauldin Economics

#Dagong Downgrades #US To A-

#China Just Downgraded America

For a long time the U.S. government maintains  its solvency by repaying its old debts through raising new debts, which constantly aggravates the  vulnerability of the federal government’s solvency

REUTERS/David Gray

A stone craftsman drills a large rock before it is sculpted into a statue in what is called the 'sculpture zone' in the town of Dangcheng in Hebei Province, located around 150 km south of Beijing, January 16, 2008.

China's credit rating agency Dagong has downgraded the U.S. rating from A to A-.

"[T]he fundamental situation that the debt growth rate significantly  outpaces that of fiscal income and GDP remains unchanged," they warned after President Obama signed a deal to end the government shutdown and raise the debt ceiling.

"For a long time the U.S. government maintains  its solvency by repaying its old debts through raising new debts, which constantly aggravates the  vulnerability of the federal government’s solvency. Hence the government is still approaching the verge of default crisis, a situation that cannot be substantially alleviated in the foreseeable future."

Dagong is not recognized by the SEC, and it does not have the influence of the big three: S&P, Moody's, and Fitch.

Not many people outside of China really follow Dagong.

Still, the downgrade appears to reflect China's deteriorating sentiment toward U.S. governance. Earlier this week, an China's Xinhua published an op-ed calling for a "De-Americanized" world.

From Dagong's press release:

On October 16, 2013 EST, the U.S. Congress approves the resolution to end the partial government shutdown and raise the debt ceiling. By such means the U.S. Federal Government can avoid the default crisis for the moment. However the fundamental situation that the debt growth rate significantly outpaces that of fiscal income and GDP remains unchanged. For a long time the U.S. government maintains its solvency by repaying its old debts through raising new debts, which constantly aggravates the vulnerability of the federal government’s solvency. Hence the government is still approaching the verge of default crisis, a situation that cannot be substantially alleviated in the foreseeable future. In light of these facts, Dagong Global Credit Rating Co., Ltd. (hereinafter referred to as “Dagong”) decides to downgrade the local and foreign currency credit ratings of the U. S., which has already been on the negative watch list, to A- from A, maintaining a negative outlook. The rationale that supports the conclusion is as follows:

 1. The partial U.S. federal government shutdown apparently highlights the deterioration of the government’s solvency, pushing the sovereign debts into a crisis status. The U.S. federal government announced its shutdown on Oct. 1, 2013, a radical event that reflects the liquidity shortage aroused by depleting stock of debts without the increase of new debts, directly resulting in the federal government lack of the funds for its normal function. The partial U.S. government shutdown is an inevitable outcome of its long-term failure to pay its excessive debts. During the fiscal years from 2008 to 2012, the ratio of the federal government’s stock of debts to fiscal income increased from 4.0 to 6.6. Under such circumstances, the federal government that can hardly sustain its own expenses, not mentioning collecting reliable income to cover its huge amount of debts. Substantial decrease of the U.S. government’s solvency is proven by this shutdown incident, which pushes the federal government into a crisis position of debt cliff and default.

 2. Since the outbreak of the U.S. debt crisis in 2008, the deviation between the federal government's sources of debt repayments and the country’s real wealth creation capacity has been constantly broadened. The huge amount of government debts that lack the basis of repayment always stands on the brink of default, and this situation is difficult to change in the long term. The federal government debt stock increased by 60.7% between 2008 and 2012 when the nominal GDP increased by only 8.5% while the fiscal income decreased by 2.9%, which indicates that fiscal income is losing its means as the primary source of debt repayments. Because of the fact that the federal government now depends highly on  borrowing new debts to repay its old ones, vulnerability of its debt chain is accumulated so that technically debt default may occur at any time. For the fundamentals of government debt repayment condition will not be essentially improved, the federal government's debt cliff will persist in the long term. 

3. Liquidity has been continuously injected into international financial markets from the U.S., which indirectly plays a key role in combating against the risk of government default. This implicit debt default behavior infringes upon the benefits of creditors. In order to avoid the debt default caused by the lack of debt repayment sources such as fiscal incomes, the U.S. government has been taking advantage of the international currency dominance of the U.S. dollar to monetize its debts and has been taking quantitative easing monetary policy to maintain its government solvency since 2008. The devaluation of the stock of debts hereby directly damages the creditors’ interests. Dagong estimates that the depreciation of the U.S. dollar caused a loss of USD628.5bn on foreign creditors over the years of 2008 to 2012.

4. The debt ceiling has been extended continually, increasing the total amount of the federal government debts. In order to avoid the sovereign debt default, it becomes an inevitable choice for the U.S. government to repay its old debts through raising new debts. The fact that the debts grow faster than the fiscal incomes will further impair the federal government’s solvency. Ever since Obama’s
inauguration in 2009, the U.S. Congress has extended the debt ceiling for five times, reaching a total volume of USD5.1tn. This further raise of the debt ceiling shows the government’s incapability of improving its solvency by improving the basic economic and fiscal elements.

5. The Democrats and the Republicans of U.S. do not have a consistent strategy target to solving the sovereign debt problem. As the issue of paying sovereign debts falls into a tool that the parties make use of to realize their own interests, the political environment is unfavorable for eliminating the risk of its sovereign debt default in the long term. The recurrence of the bi-partisan conflict over debt ceiling once again reveals the U.S. superstructure’s incapacity to solve national debt crisis. A debt crisis evolves into a political crisis, which in turn exacerbates the debt crisis. Such political
environment over debt repayment renders the dim and pale prospect of the U.S. federal government’s solvency.

Dagong Downgrades US To A- - Business Insider


The Pangea Advisors Blog

#StanChart #PrivateBank Assets Stagnate in Asian Wealth Hunt @Bloomberg

Standard Chartered Plc (2888)'s Asian private-bank asset growth has stagnated this year as the lender focused on wealthier clients and investment returns were curtailed by volatility in regional financial markets.

New minimum of $2mm and reducing number of accounts managed by each relationship manager to 30 from 50 to better service their clients. 

AUM stands at $50 billion. 

To read the entire article on Bloomberg, go to http://bloom.bg/GROS2C

The Richest Family Offices - Bloomberg

The Richest Family Offices - Bloomberg

Geneva Mansions Sell at Discount as Tax Scares Expats - Bloomberg

Of course 'at a discount' in Geneva is all relative...

Asking prices for luxury homes in Geneva fell by an average of 9 percent to 14,829 francs per square meter since peaking in 2011

Geneva Mansions Sell at Discount as Tax Scares Expats

By Simeon Bennett and Giles Broom - Aug 26, 2013

Real estate broker Alexander Koch de Gooreynd relayed a difficult message to a client last June: the 39.5 million Swiss-franc ($43 million) asking price for his eight-bedroom lakefront villa in Geneva was too high.
The 8,600 square-foot (800 square-meter) home with yacht mooring, wine cellar and kennels in Collonge-Bellerive, where Saudi Arabia’s King Fahd built a summer palace in the 1970s, had been on the market for nine months. The seller took his advice and the house sold for 31.5 million francs in December.
“The heady days are over,” said Koch de Gooreynd, head of London-based Knight Frank LLP’s Swiss residential team, adding that the house might have fetched the higher price two years ago. “Vendors are becoming much more realistic.”
Geneva luxury-home prices, among the highest in the country, are tumbling as buyers are spooked by proposals to end tax breaks for foreign millionaires and the number of multinationals moving to the city slows. Houses in Geneva worth at least 6 million francs have declined by as much as 25 percent in the past 12 months, said Sebastien Rohner, a Geneva-based broker at Barnes International Luxury Real Estate.
“I’ve never known a slump like this before,” Rohner said. “Wealthy people are still attracted to Geneva, but they are taking their time and renting before buying.”

Market Stagnation

The slump in Geneva’s luxury market comes as the average house price in the city declined 1 percent to 2.6 million francs in the first half of 2013 from a record high in 2011, according to data compiled by Wuest & Partner AG, a real estate consulting firm with offices in Geneva and Zurich. House prices in Geneva more than doubled in the previous 13 years, while values in the rest of Switzerland rose 53 percent, Wuest & Partner’s figures show.
“In regions like Zurich and Lake Geneva, where house prices have reached a pretty high level, there is stagnation or a modest correction,” said Robert Weinert, a market analyst at Wuest & Partner in Zurich. “Prices have reached a level where not many people can afford them.”
UBS AG (UBSN)’s Swiss Real Estate Bubble Index rose in the second quarter as mortgage lending in Switzerland increased 4.3 percent from a year earlier, exceeding a gain in disposable household income of 1.4 percent, the country’s biggest bank said on Aug. 5.
To prevent a repeat of the property-market crisis of the 1990s, which hobbled economic growth for years, the Swiss National Bank sponsored the introduction in February of a capital buffer, which forces lenders to hold an extra 1 percent of risk-weighted assets tied to residential mortgages.

Cooling Market

That helped cool Geneva’s housing market by pushing up the 10-year fixed home loan rate to 2.4 percent from 1.8 percent in February, Weinert said.
Geneva, less than a two-hour drive from the ski resorts of Chamonix and Verbier, has used low taxes, political stability and quality of life to lure more than 900 multinationals, including Procter & Gamble Co. (PG), commodity traders such as Gunvor SA and hedge fund managers, Brevan Howard and BlueCrest Capital Management LLP. In 2009, Dinara Kulibayeva, second daughter of Kazakh President Nursultan Nazarbayev and the billionaire owner of Halyk Savings Bank, bought a house in the Geneva suburb of Anieres for a record 74.7 million francs.
The influx of expatriates has slowed, sapping demand, said Claudio Saputelli, an economist at UBS in Zurich and co-author of the bank’s quarterly bubble index report.
“We’re not seeing as many expats moving to Geneva,” said Saputelli. “The market has become more and more difficult for high-end apartments.”

Tax Break

Germany’s Merck KGaA last year announced plans to close the Serono unit it bought from billionaire Ernesto Bertarelli in 2007, resulting in the loss of 1,250 jobs in Geneva.
Wealthy foreigners were also drawn to Geneva by a 150-year-old tax break that enables them to avoid paying income tax via an expenditure-based levy known as a forfait. Geneva’s Socialist Party in January 2012 submitted the 10,000 signatures necessary to force a vote on abolishing the program. While the Geneva government and a majority of the canton’s lawmakers voted in June to reject that proposal, the initiative prompted the canton to consider revising the tax break by September 2014.
“This indecision, it kills the market,” Koch de Gooreynd said. “It’s any concern that things might be about to change.”
After Zurich became the first canton to abolish the forfait in 2009, with almost 53 percent voting against the system, 97 of the 201 beneficiaries of the tax left the canton. About two-thirds of them relocated to other parts of Switzerland.

Negotiating Room

Asking prices for luxury homes in Geneva fell by an average of 9 percent to 14,829 francs per square meter since peaking in 2011, according to UBS. In the suburbs of Florissant and Malagnou, east of Geneva’s old town, the drop was 24 percent.
The decline is probably even steeper because the numbers are based on advertised asking prices and weaker demand is enabling buyers to negotiate better deals, said Saputelli.
“More and more prices are under discussion,” Saputelli said in a phone interview. “That wasn’t the case two or three years ago, when demand was so high that you had no chance to bargain the price down.”
The decline will probably continue for another 12 months, said Christian Kraft, head of Swiss retail estate research at Credit Suisse Group AG. (CSGN)

Scared Buyers

The number of new buyers has fallen by half, said David Colle, managing director of Luxury Places, a Geneva-based brokerage. “People are scared a little bit, they’re just waiting,” he said. “There’s less demand, there’s less buyers coming every day to us.”
In Cologny, another of Geneva’s millionaire lakeside suburbs, there are 10 to 15 homes on the market for more than 10 million francs compared with just one or two back in 2011, Knight Frank’s Koch de Gooreynd said.
“Buyers are increasingly savvy now, especially with such a big selection out there,” he said. “Still, Switzerland remains one of the key markets for people to invest, relocate their business and bring their families due to the safe and secure environment, stable economy and the high quality of life available.”
To contact the reporters on this story: Simeon Bennett in Geneva at sbennett9@bloomberg.net; Giles Broom in Geneva at gbroom@bloomberg.net
To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Phil Serafino at pserafino@bloomberg.net; Rob Urban at robprag@bloomberg.net.

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Geneva Mansions Sell at Discount as Tax Scares Expats - Bloomberg


The Pangea Advisors Blog

Decisions are worthless … unless you turn them into commitments.

Broken commitments damage tasks, relationships, and culture. 

Are You Making This Mistake at the End of Your Meetings? | LinkedIn

Five frogs are sitting on a log. Four decide to jump off. How many are left? Five, because deciding is different than doing.”

Decisions are worthless … unless you turn them into commitments.

In a business conversation, your counterpart's decision states his intention, but a commitment holds him accountable. Although a commitment does not guarantee delivery, it’s far more reliable than a decision. More importantly, when managed properly, it allows you to handle breakdowns with effectiveness, trust and integrity.

Have you been in meetings where lots of decisions are made but nothing gets done andnobody is held accountable? Unless you finish the meeting with commitments about“who will do what by when,” you’ve just built 90% of a bridge.

Broken commitments damage tasks, relationships, and culture. They bring about inefficiencies, mistrust, and corruption. Coordination suffers, collaboration suffers, and cohesion suffers. You can avoid this suffering – if you finish every conversation with clear commitments.

Read the whole piece on Linkedin:  Are You Making This Mistake at the End of Your Meetings? | LinkedIn

#Falciani and his stolen data from #Swiss #Banks

From The International Herald Tribune:

Fugitive can name names of Swiss bank account holders

BY DOREEN CARVAJAL AND RAPHAEL MINDER

PARIS — Hervé Falciani is a professed whistle-blower — the Edward Snowden of banking — who has been hunted by Swiss investigators, jailed by Spaniards and claims to have been kidnapped by Israeli Mossad agents eager for a glimpse of the client data he stole while working for a major financial institution in Geneva.

‘‘I am weak and alone,’’ Mr. Falciani said, as three round-the-clock bodyguards provided by the French government looked on with hard stares. The protection was needed, he insisted, because he faces constant risk as the sole key to decipher the encrypted data — five CD-ROMs containing a list of nearly 130,000 account holders that may be the biggest leak ever in the secretive world of Swiss banking.

But as he settled into a deserted bistro for a two-hour lunch, Mr. Falciani, who has been on the run since 2008, seemed oddly relaxed for a fugitive. And why not?

The former computer technician is in high demand these days, having cast himself as a crusader against the murky world of Swiss banking and money laundering. Once dismissed by many European authorities, he and other whistle-blowers are now being courted as the region’s governments struggle to fill their coffers and to stem a populist backlash against tax evasion and corruption.

‘‘It’s an economic war,’’ said Mr. Falciani, an angular man of 41 with a dark goatee who sometimes dons disguises, though on a muggy summer afternoon favored an innocuous beige tie and short-sleeved dress shirt. ‘‘In Switzerland, the banks are so organized that they are able to circumvent new rules and laws to continue to enable tax evasion.’’

Critics, not least at his former employer HSBC, scorn and dismiss Mr. Falciani as a manipulator more dazzled by money than high ideals. The data he has leaked — some say sold — since 2008 has wreaked havoc within the banking world, as well as the moneyed and political classes of Europe.

Mr. Falciani’s information formed the basis for the now famous ‘‘Lagarde list’’ that has roiled Greek politics with its revelations of oligarchs and politicians who avoided taxes by stashing millions in Switzerland. His data is also credited with helping Spain collect 260 million euros ($345 million) in taxes and identify more than 650 tax evaders, including the president of Banco Santander.

In 2012, Mr. Falciani passed his information to American authorities. They, in turn, used the data to pursue an investigation into whether HSBC flouted controls on money laundering, eventually forcing a $1.92 billion settlement with the bank in December.

More than a few rich and powerful people await his next move. Mr. Falciani asserts that only a small portion of the data has been decrypted and used.

Since being released from jail this year after a Spanish judge denied a Swiss extradition request, Mr. Falciani, who is married and has a young daughter, has resurfaced in France. Authorities here have offered protection in exchange for Mr. Falciani giving testimony to local prosecutors who are investigating whether HSBC helped French clients dodge taxes.

‘‘My main objective is to help authorities develop a defense,’’ Mr. Falciani said.

‘‘We are under attack and losing a lot of tax money,’’ he said of the Swiss banking system. ‘‘If you have enemies who want to invade, laws are not enough and you need armies to build an economic defense.’’

A native of Monaco who was educated in the south of France, Mr. Falciani once worked in obscurity as a computer technician at HSBC. In 2005, he was promoted and transferred to Geneva. The following year, he said he raised concerns to his bosses about security flaws in the Swiss system that could violate the privacy of depositors.

Ignored by his superiors, Mr. Falciani said he started collecting the information methodically, in an effort to prove the system was vulnerable. The bank denies that he ever alerted them and believes that he amassed the information over a two-year period.

Early on, Mr. Falciani said he got the brushoff from German bureaucrats who weren’t interested in his trove of data. His information was also shunned in France by the previous administration when ‘‘authorities tried to make evidence disappear and they didn’t want to know,’’ he said.

Then the European economy slumped and governments started to take notice.

In a report from the French National Assembly issued in July, the lawmaker Christian Eckert chided authorities for being slow to use Mr. Falciani’s list. According to Mr. Eckert, the information included 127,311 clients, including 6,313 from France who were suspected of tax evasion.

HSBC dismisses Mr. Falciani’s information as flawed, insisting the small sample the bank has seen is filled with errors. At the time of his employment, the bank contends it had only 100,000 customers and that the stolen data only affected 15,000 clients.

‘‘To our knowledge it has always been Falciani’s intention to sell the data,’’ David Brügger, a bank spokesman, said in an e-mail statement. ‘‘Only faced with the prospect of extradition and extended time behind bars, Falciani decided to cooperate with the Spanish authorities. A scheme he is now repeating with France and other countries.’’

That theory is echoed by Georgina Mikhael, a former HSBC computer consultant who worked with Mr. Falciani in Geneva.

Ms. Mikhael says she helped Mr. Falciani develop a Hong Kong based company, Palorva, to sell data to other banks, initially believing he obtained the information through what he called ‘‘data mining’’ from the Internet. She said they went to Lebanon in 2008 to sell their services to four banks. She said she grew suspicious when Mr. Falciani insisted on using a false Arabic name, Ruben Al-Chidiack, for their business dealings.

‘‘He never gives something for free,’’ said Ms. Mikhael, who noted that after the Lebanon effort failed Mr. Falciani tried to approach German and French intelligence services, usually carrying a knife in his bag because he feared the risks. ‘‘Always he is asking. He is not Robin Hood.’’

Ms. Mikhael, who is currently unemployed and lives in her native Lebanon, says that she was Mr. Falciani’s mistress, believing that he planned to divorce his wife. She is now pursuing a defamation lawsuit against him in France, stemming from his contention that he was kidnapped by Mossad secret agents in Geneva who were seeking bank information about people with Hezbollah ties, including her. Ms. Mikhael says she does not have Hezbollah ties and is Christian.

Mr. Falciani disputes that he is peddling his information for cash and the claims — pressed by Ms. Mikhael — ‘‘are part of moves that people are keen to play’’ to harm his reputation. ‘‘'Never have I or anyone close to me asked or accepted money for information,’’ he said.

In 2012, Swiss authorities gave Mr. Falciani safe pass to meet in Switzerland to discuss a deal to plead guilty to data theft with a suspended sentence, provided he stopped sharing the information. Mr. Falciani said he strung them along to protect his own safety, waiting for a new government in France that might take his claims more seriously.

Now that the political tide has turned, Mr. Falciani wants to continue working with authorities.

As the investigations play out, Mr. Falciani said he was holding down a day job, working for a European Union project as a computer researcher to develop algorithms to detect abnormal behavior. But he worries about his long-term safety, wondering whether he will live another year. He notes that his house has been broken into and that his wife was recently fired from a job at a shoe store because of his notoriety

‘‘This business represents thousands of billions of euros,’’ he said. ‘‘From my side, I’m frightened.’’ ◼

A Fugitive With a Cause - NYTimes.com

These are the old ways of investment #banking: ‘I repaid my clients’ fraud losses out of my own pocket’ - @FT

if you want to be in a business that implies a special degree of trust from customers, you cannot be motivated purely by self-interest; you have to be accountable. These are the old ways of investment banking 

They don't make them like they used to...  Trust and Responsibility seems to be in short supply these days, and not only for the Financial Sector

Read the whole post on the FT website here:  First Person: ‘I repaid my clients’ fraud losses out of my own pocket’ - FT.com

Property Crushes Hedge Funds in Alternative Markets - Bloomberg

diversifying into alternatives makes sense even if they don't outperform.

Property Crushes Hedge Funds in Alternative Markets

Mackenzie Stroh/Bloomberg Markets
Hamilton "Tony" James says diversifying into alternatives makes sense even if they don't outperform.

“Why would anyone invest in the stock market?”

Hamilton “Tony” James looked up from his notes and peered out at the audience over the rims of his glasses. The investors seated in the chandelier-adorned meeting room of New York’s Waldorf-Astoria hotel had been in their chairs for hours. Yet James paused to let his point sink in. Someone laughed. James, president since 2005 of Blackstone Group LP (BX), was stone-faced.
The occasion was Blackstone’s third annual investor day, Bloomberg Markets magazine reports in its August issue. The firm is the world’s largest manager of so-called alternative investments, with $218 billion under management. It runs private-equity funds and hedge funds, invests heavily in credit securities and owns vast expanses of real estate. One of its properties is the Waldorf itself.
More from the August issue of Bloomberg Markets:

• COVER STORY: Michael Glimcher, Prince of Property
• PRIVATE EQUITY: Leon Black's Apollo Rises Again
• JAPAN: Abe's Urgent Agenda
• SOCCER: The Future of Women's Game in U.K.
• REAL ESTATE: Mega-Rich Landlords Out for Vengeance
• SAILING: Larry Ellison Speeds Up America's Cup

When James finally answered his own question about stocks, he told the audience they were a fool’s game compared with Blackstone’s investment funds, which have returned at least 15 percent annualized during the past 26 years, according to the firm. A good investment lately is Blackstone. The firm’s shares returned 89.4 percent during the 12 months ended on June 10, while still trading below their initial offering price in 2007.
Alternatives such as those managed by Blackstone have gained in popularity during the past 20 years as investors searched for alpha -- returns uncorrelated with and higher than those offered by the broad stock and bond markets.

Celebrity Investing

The people who run companies specializing in alternatives - - including billionaires such as Steve Cohen, Henry Kravis, John Paulson and Blackstone co-founder Steve Schwarzman -- have become celebrities. Assets overseen by hedge funds alone increased to $1.87 trillion this year from $118 billion in 1997 -- much of it from pension funds, endowments, family offices and sovereign-wealth funds.
Virtually every alternative category crashed in the financial meltdown of 2007 to 2009 -- none more severely than property, with housing and commercial real estate prices falling as much as 40 percent.
Yet as markets have recovered, it’s real estate that has led the way. The sector dominates Bloomberg Markets’ ranking of alternatives, which shows that real estate investment trusts -- which pool investor money to buy property and are sold like stocks -- have gained more than any other alternative category in the past three years. Large-capitalization REITs returned 17.3 percent annualized in the three years from March 31, 2010, to March 28, 2013, besting private equity, which returned 15.2 percent.

Index Search

To find the best-performing unconventional investments, Bloomberg searched its own indexes covering hedge funds, funds of funds, commodities and REITs. Bloomberg’s Rankings team also drew on outside indexes in search for the best-performing private-equity funds and collectibles, such as vintage cars, stamps, contemporary art and wine.
The best bets ranged from corn and silver futures, which returned 33.8 percent and 20.5 percent annualized over three years, to a Chateau Pavie Bordeaux and a 1957 Ferrari 250 Testarossa, which recently sold for $16.4 million.
Among the worst-performing alternatives were hedge funds, which returned 3.3 percent, and funds of hedge funds, which lost money overall. Most alternatives struggled to beat the Standard & Poor’s 500 Index (SPX), which returned 12.7 percent annualized over the three years ended on March 28 and was up more than 15 percent this year as of July 10.
James says that investing in alternatives makes sense even when they underperform.

No Correlation

“If you can put a bunch of money into these idiosyncratic investments, then you get a lot of diversification benefit because the returns are very uncorrelated” to the broader markets, he says, speaking from his office 44 floors above Park Avenue in Manhattan. “So even though you are putting a riskier asset in your portfolio, because it’s not correlated with everything else that you own, the portfolio volatility actually comes down.”
For investors in real estate and REITs, valuations fell further and faster than other assets and have in the past three years jumped higher than the S&P 500.
“If you wind the clock back to 2009, real estate had just been through a tremendous crash that helped bring down the global economy,” says Bob Rice, managing partner at New York-based merchant bank Tangent Capital Partners LLC and author of “The Alternative Answer” (HarperBusiness, 2013). “Things that are way down are going to come back. On top of that, central banks have given people a prevalence of cheap money to borrow and get back into alternatives such as real estate.”

Glimcher on Top

The return of consumer confidence has helped drive up REIT share prices by sending shoppers back to the stores. REITs that invest in shopping malls boasted the best performance for the three years ended on March 28, with an annualized return of 25.3 percent, according to data compiled by Bloomberg. Leading the list of best-performing mall investors was Michael Glimcher, whose Columbus, Ohio-based Glimcher Realty Trust (GRT) gained 38 percent.
Other categories of REITs that produced 20 percent-plus three-year annualized returns included self-storage units, industrial plants, health care, retail and Asian real estate.
Although REITs are still largely a U.S. phenomenon, they’re also a growing asset class in Europe and Asia. REITs globally raised $22.6 billion in the first quarter of the year, on pace to surpass the record $73.3 billion they collected in 2012.

REITs Triumph

“You’ve had tremendous gains in the assets that REITs are investing in, which is driving enthusiasm and performance,” says Brian Hargrave, chief investment officer at ZAIS Financial Corp. (ZFC), a mortgage-focused REIT run by Red Bank, New Jersey-based asset manager ZAIS Group LLC. “It’s a theme among investors to get exposure to the recovering housing economy.”
For U.S. investors, the advantage of REITs is that they’re required by the Internal Revenue Service to distribute at least 90 percent of their taxable earnings to shareholders as dividends, in exchange for paying little or no corporate income tax.
“That’s probably the single biggest benefit to the investor,” Hargrave says.
Yet real estate is a volatile and cyclical investment, with REIT prices rising and falling along with movements in the larger economy. That became clear in May, when U.S. Federal Reserve Chairman Ben Bernanke’s announcement that the Fed might slow its debt-buying program sent bond prices plunging. Shares of mortgage REITs fell 11.2 percent for the month ended July 10.

Leverage Rises

Meanwhile, the real estate moguls whose heavy borrowing helped fuel the 2008 financial crisis are back at it, taking advantage of Federal Reserve-driven low interest rates to amplify their returns through leverage. In an April report, the U.S. Treasury’s Financial Stability Oversight Council cited the borrowing of mortgage REITs as a source of instability in the economy.
“You’re starting to see more and more REITs that are borrowing to pay their dividends,” Tangent Capital’s Rice says. “That’s a bit of a yellow flag in terms of whether you want to be chasing the asset class right now.”
When central banks finally start raising interest rates, that could put a quick end to the new property boom, says David Fann, chief executive officer of TorreyCove Capital Partners LLC, a La Jolla, California-based firm that advises investment managers.
“Real estate has been a huge beneficiary of quantitative easing,” he says, referring to the Federal Reserve program to keep interest rates low by buying mortgage securities and other bonds. “When interest rates begin to rise, that’s going to curtail the longer-term appeal of real estate investing.”

Hedging Losses

Hedge funds, once the quintessential alternative investment, have been disappointing investors for years. The poor performance of macro funds, which make bets on movements in the broad economy, has been a reason for hedge funds’ overall mediocre 3.3 percent return.
Fund-of-funds operators, who try to find the best performers, have done even worse: Those funds lost an annualized 3.8 percent over three years. More than 600 funds of funds, or 25 percent of the total, have gone out of business since 2007. And assets under management in hedge funds have declined 13 percent in that period.
Even as the hedge-fund universe has shrunk, pension funds and other institutional investors have moved their money into the biggest, most successful funds.

‘Index Effect’

“Hedge funds in aggregate are going to look more and more like the broader market as their asset base continues to grow,” says Carl Friedrich, chief investment officer at Woodbury, New York-based investment adviser Piermont Wealth Management Inc. “You get an S&P 500-like index effect.”
Hedge-fund investors smart enough to bet on a rebound in housing via mortgage-backed securities fared well. Those funds gained more than 20 percent annualized during the three-year period. And the best of them, Metacapital Mortgage Opportunities, run by Metacapital Management LP’s Deepak Narula, returned more than 30 percent.
Commodities investors found the best returns in their breakfast cereal bowl: corn. While overall commodities gained a paltry 3.1 percent, corn futures returned 33.8 percent in the three years, as the U.S. government raised the required ethanol content of gasoline. Also, rising incomes in emerging markets increased meat consumption and thus grain purchases to feed the livestock.

Corn Roast

“Corn’s been going up in price over the last few years,” says Paul Ashworth, chief North America economist at London-based research firm Capital Economics Ltd. Ashworth said he believes corn and other agricultural commodities are overpriced and that what he calls a bubble will burst in the next few years. “We’re talking about low interest rates to buy farmland and also higher yields for corn per acre,” he says.
For wealthy individuals, alternative investing isn’t just about hedge funds and commodities. They also sink their money into collectibles such as stamps, coins, art and wine. Among those more-exotic investments, the top performers were classic cars and coins, with indexes that track prices of those collectibles up more than 15 percent annualized over three years.
Art connoisseurs lucky enough to own paintings by the late American artist Adolph Gottlieb (1903 to 1974) saw the value of his works rise by 65.5 percent annualized over three years. One Gottlieb painting, Balance, was sold at a Christie’s auction on May 15 in New York. The auction house’s projected sale price was $800,000 to $1.2 million. It sold for $3.3 million.

Buy Bordeaux

Meanwhile, wine investors who had been holding on to a bottle of 2004 Chateau Pavie Bordeaux saw its value rise 107.3 percent over three years. The wine sold in June for as much as $400 a bottle.
The alternative asset class that has made Blackstone a hot stock, private equity -- aka leveraged buyouts -- has benefited greatly from the post-crisis low-interest-rate environment.
“It’s one of the consequences of the great financial crisis,” TorreyCove’s Fann says. “In many cases, the large deals that were undertaken during the boom period got salvaged because of quantitative easing.”
One beneficiary was Apollo Global Management LLC (APO), the New York-based firm run by Leon Black. Apollo was able to refinance crisis-era debt in companies such as Harrah’s Entertainment Inc. that the firm bought at high prices during the bubble.
Today, private equity is bigger than ever. Global private-equity holdings surpassed $3 trillion of assets under management in 2011 for the first time, according to London-based research company Preqin Ltd., and have continued to grow. KKR & Co. (KKR) -- run by billionaires Kravis and George Roberts, his cousin -- owns companies that employ about 980,000 people. Blackstone’s portfolio of companies boasts more than 730,000 workers, while Apollo companies employ 370,000.

Fundraising Lags

Despite the buyout industry’s benchmark-beating returns, fundraising has lagged in recent years. Private-equity funds in the first quarter had taken an average of 18 months to close, the most in three years, according to Preqin. First-time funds secured just $4 billion globally in the quarter compared with $32 billion in the second quarter of 2008.
Private equity’s solution to the funding problem is to aim lower.
Blackstone, KKR and Carlyle Group LP (CG), the Washington-based buyout firm that manages $176 billion in assets, usually open their doors only to clients willing to commit at least $5 million. In the past year, all three have introduced offerings such as mutual funds and exchange-traded funds to cater directly to individuals.
Chasing 401(k)s
One goal is to penetrate corporate retirement funds, which will hold $5 trillion by 2016, according to Boston-based research firm Cerulli Associates.
“We definitely would like to be part of 401(k) platforms,” says Mike Gaviser, a KKR managing director.
In January, Carlyle started a fund with New York-based investment firm Central Park Group LLC that will accept as little as $50,000 from individual investors. It’s called the CPG Carlyle Private Equity Fund. CPG will allocate money from the pool to Carlyle-managed buyout funds.
“These things are selling like hot cakes right now,” Tangent Capital’s Rice says. “This is the next wave of alternative offerings.”
That’s cause for concern to David John, deputy director of the Retirement Security Project at the Brookings Institution in Washington.
“Should this start to take hold, there needs to be either a licensing, a seal of approval or some level of higher oversight so people don’t find that they are investing in something that really isn’t suitable for their stage of life,” he says.

‘Rational’ Investors

For both institutions and individuals looking for benchmark-beating returns, the world of alternative investing remains alluring.
“We are reaching a point when institutions are basically saying, why shouldn’t we allocate more money to an area with more return?” Blackstone’s Schwarzman told the audience at a Morgan Stanley conference in June. “And the answer is: Any rational person would.”
To contact the reporter on this story: Devin Banerjee in New York at dbanerjee2@bloomberg.net.
To contact the editors responsible for this story: Michael Serrill at mserrill@bloomberg.net; Christian Baumgaertel at cbaumgaertel@bloomberg.net.

Property Crushes Hedge Funds in Alternative Markets - Bloomberg

Why Hedge Funds' Glory Days May Be Gone for Good - Businessweek

As of the end of June, hedge funds had gained just 1.4 percent for 2013 and have fallen behind the MSCI All Country World Index for five of the past seven years

Hedge fund performance lagged the Standard & Poor’s 500-stock index by approximately 10 percentage points this year, although most fund managers still charged enormous fees in exchange for access to their brilliance. 

Why Hedge Funds' Glory Days May Be Gone for Good

At the height of the financial crisis in 2008, a group of famous hedge fund managers was made to stand before Congress like thieves in a stockade and defend their existence to an angry public. The gilded five included George Soros, co-founder of the Quantum Fund; James Simons of Renaissance Technologies; John Paulson of Paulson & Co.; Philip Falcone of Harbinger Capital; and Kenneth Griffin of Citadel. Each man had made hundreds of millions, or billions, of dollars in the preceding years through his own form of glorified gambling, and in some cases, the investors who had poured money into their hedge funds had done OK, too. They were brought to Washington to stand up for their industry and their paychecks, and to address the question of whether their business should be more tightly regulated. They all refused to apologize for their success. They appeared untouchable.

What’s happened since then is instructive. Soros, considered by some to be one of the greatest investors in history, announced in 2011 that he was returning most of his investors’ money and converting his fund into a family office. Simons, a former mathematician and code cracker for the National Security Agency, retired from managing his funds in 2010. After several spectacular years, Paulson saw performance at his largest funds plummet, while Falcone reached a tentative settlement in May with the U.S. Securities and Exchange Commission over claims that he’d borrowed money from his fund to pay his taxes, barring him from the industry for two years. Griffin recently scaled back his ambition of turning his firm into the next Goldman Sachs (GS) after his funds struggled to recover from huge losses in 2008.

As a symbol of the state of the hedge fund industry, the humbling of these financial gods couldn’t be more apt. Hedge funds may have gotten too big for their yachts, for their market, and for their own possibilities for success. After a decade as rock stars, hedge fund managers seem to be fading just as quickly as musicians do. Each day brings disappointing headlines about the returns generated by formerly highflying funds, from Paulson, whose Advantage Plus fund is up 3.4 percent this year, after losing 19 percent in 2012 and 51 percent in 2011, to Bridgewater Associates, the largest in the world.

This reversal of fortunes comes at a time when one of the most successful traders of his time, Steven Cohen, founder of the $15 billion hedge fund firm SAC Capital Advisors, is at the center of a government investigation into insider trading. Two SAC portfolio managers, one current and one former, face criminal trials in November, and further charges from the Department of Justice and the SEC could come at any moment. The Federal Bureau of Investigation continues to probe the company, and the government is weighing criminal and civil actions against SAC and Cohen. Cohen has not been charged and denies any wrongdoing, but the industry is on high alert for the possible downfall of one of its towering figures.

Despite all the speculation and the loss of billions in investor capital, Cohen’s flagship hedge fund managed to be the most profitable in the world in 2012, making $789.5 million in the first 10 months of the year, according to Bloomberg Markets. His competitors haven’t fared as well. One thing hedge funds are supposed to do—generate “alpha,” a macho term for risk-adjusted returns that surpass the overall market because of the skill of the investor—is slipping further out of reach.

According to a report by Goldman Sachs released in May, hedge fund performance lagged the Standard & Poor’s 500-stock index by approximately 10 percentage points this year, although most fund managers still charged enormous fees in exchange for access to their brilliance. As of the end of June, hedge funds had gained just 1.4 percent for 2013 and have fallen behind the MSCI All Country World Index for five of the past seven years, according to data compiled by Bloomberg. This comes as the SEC passed a rule that will allow hedge funds to advertise to the public for the first time in 80 years, prompting a flurry of joke marketing slogans to appear on Twitter, such as “Creating alpha since, well, mostly never” (Barry Ritholtz) and “Leave The Frontrunning To Us!” (@IvanTheK).

Hedge funds are built on the idea that a smarter guy (and they are almost all guys; only 16.8 percent of managers are women) with a better computer can make miracles possible by uncovering inefficiencies in the market or predicting the future. In pure dollar terms, there are more resources, advanced degrees, and computing firepower devoted to chasing this elusive goal than almost any other endeavor, and that may include fighting wars. Yet traders face the immutable fact that every second, each megabyte of information, blog post, one-line rumor, revenue estimate, or new product order from China has already been taken into account by the efficient market and reflected in a security’s price. This means that trying to gain what traders call an “edge,” at least legitimately, is almost impossible. As the financial incentives on Wall Street have become enormous, so have the competition and pressure to gain an advantage at any cost.

Few people will shed tears for an industry that has produced more than its fair share of billionaires—some of whom, like Cohen, are notorious for their displays of wealth. Nevertheless, the decline of hedge funds has implications beyond Wall Street. The financial kingpins who profited most from hedge funds’ golden age gained the ability to make influential political donations and to bend big banks to their will. In the U.S., hedge funds manage a significant portion of pension funds and university endowments. For investors who chased the colossal returns once promised, the downturn may well bring painful losses. But it could also be the beginning of a virtuous cycle. If it’s going to survive, the industry may need to get smaller and a lot more modest.

Hedge funds began as a small, almost sideline, service. They were the alternative investments for the wealthy, intended to perform differently than the overall market. “Any idiot can make a big return by taking a big risk. You just buy the S&P, you lever up—there’s nothing clever about that,” says Sebastian Mallaby, the author of More Money Than God: Hedge Funds and the Making of a New Elite. “What’s clever is to have a return that’s risk-adjusted.”

This is what Alfred Winslow Jones, an Australian-born onetime financial journalist, had in mind in 1949 when he created a private investment partnership that was designed to be “hedged” against gyrations in the market. Jones borrowed shares, sold them short, and hoped to earn an offsetting profit on them if the market dropped and his long positions lost value.

It didn’t come without risks: Shorting exposes an investor to potentially limitless losses if a stock keeps rising, so regulators decided that only the most sophisticated investors should be doing it. Hedge funds would be allowed to try to make money almost any way they wanted, and charge whatever fees they liked, as long as they limited their investors to rich people who, in theory, could afford to lose whatever money they put in. It was a side bet.

For a while, the funds were expected to produce steady, modest returns, in contrast to the wider swings of the market. In a 2011 paper that he updated this year, Roger Ibbotson, a finance professor at the Yale School of Management who runs a hedge fund called Zebra Capital Management, analyzed the performance of 8,400 hedge funds from 1995 to 2012; he concluded that on average they generated 2.5 percent of precious alpha. “They have done a good job, historically,” Ibbotson says. “Now, I think it’s overcapacity. I doubt that the alphas are completely gone, but alphas are going to be harder to get in the future than they have been in the past.”

With each millionaire-minting stock market boom, the number of hedge funds has increased as the rich scour the market for new ways to get even richer. It’s no coincidence that the first decade of the 21st century, when the wealthiest 0.1 percent became exponentially wealthier, marked the high-water mark for hedge funds. Now there are about 10,000 hedge funds managing $2.3 trillion. The pioneers, such as Cohen and Paulson, had learned that working at investment banks with their brutal hours and byzantine corporate cultures—not to mention the fighting over bonuses every January—was for suckers. Hedge funds offered would-be financial hotshots a faster and more glamorous path to obscene wealth.

One of the most alluring aspects of the business vs. other sectors of Wall Street is what people in the tech world call “scalability.” Hedge fund managers could easily expand their annual bonuses from millions a year to tens of millions or more just by bringing in more investor money and making the fund larger, often with little extra work. Most hedge funds charge a management fee of 2 percent of assets, which is intended to cover expenses and salaries, as well as 20 percent of the profit generated by the fund at the end of the year. A fund managing $300 million would take $6 million in fees, plus its 20 percent cut; if the fund grew to $3 billion in assets, the management fee would jump to $60 million. If a fund of that size returned only 6 percent that year, it would generate $180 million in profit, $36 million of which the managers could keep. It quickly starts to look like a smart use of a Harvard degree.

Yet this once hugely lucrative model has proven unsustainable. One chief investment officer at a $5 billion institution breaks down the typical hedge fund life cycle into four evolutionary stages. During the early period, when a fund is starting out, its managers are hungry, motivated, and often humble enough to know what they don’t know. This tends to be the best time to put money in, but also the hardest, as the funds tend to be very small. Stage two occurs once the fund has achieved some success, when those making the decisions have gained some confidence but they aren’t yet so well-known that the fund is too big or impossible to get into.

Then comes stage three—the sort of plateau before the fall—when the fund gets “hot” and suddenly has to beat back investors, who tend to be drawn to flashy success stories like lightning bugs to an electric fence. Stage four occurs when the fund manager’s name is spotted as a bidder for baseball teams or buyer of zillion-dollar Hamptons mansions. Most funds stop generating the returns they once did by this stage, as the manager becomes overconfident in his abilities and the fund too large to make anything that could be described as a nimble investing move. “The bigger a fund gets, the more difficult it gets to maintain strong performance,” says Jim Liew, an adjunct professor of finance at New York University’s Stern School of Business. “That’s just because the number of opportunities is limited in terms of putting that much money to work.”

Hedge funds have also been hurt by their success. Most of the advantages their investors once had—from better information to far fewer people trying to do what they do—have evaporated. In the easy, early days, there was less than $500 billion parked in a couple thousand private investment pools chasing the same inefficiencies in the market. That’s when equities were traded in fractions rather than decimals and before the SEC adopted Regulation FD, which in 2000 tightened the spigot of information flowing between company executives and hungry traders.

After 2000, the supposed “smart” money began paying expert network consultants—company insiders who work as part-time advisers to Wall Street investors—to give them the information they craved. The government has since cracked down on that practice, which in some cases led to illegal insider trading. The rise of supercharged computer trading means speed is one of the few ways left to gain an advantage.

As their returns have fallen, the biggest hedge funds have started to seem more like glorified mutual funds for the wealthy, and those rich folks might start to take a harder look at whether they’re getting their money’s worth. This could be an encouraging development for the world economy, considering that hedge funds provided huge demand for the toxic mortgage derivatives that helped lead to the financial collapse of 2008. At the same time, the tens of billions that pension funds have plowed into funds such as Bridgewater’s All Weather Fund—down 8 percent for the year as of late June, according to Reuters, compared with a 10.3 percent rise in the S&P 500—mean that the financial security of untold numbers of retirees could be threatened by a full-scale hedge fund meltdown.

For the moment, that possibility seems remote. The age of the multibillionaire celebrity hedge fund manager may be drawing to a close, but the funds themselves can still serve a useful purpose for prudent investors looking to manage risk. Let the industry’s recent underperformance serve as a reality check: No matter how many $100 million Picasso paintings they purchase, hedge fund moguls are not magicians. The sooner investors realize that, the better off they will be.

Why Hedge Funds' Glory Days May Be Gone for Good - Businessweek