Mistakes from the Past; Lessons for the Future

If you want to try your hand at investing, one good tip you can take on is learning lessons from the past. Over the last few years there have been significant opportunities for such lessons. For example, we learned in 2007 that when the market doubles is a good time to take your profits. But don’t be unrealistic or have high expectations. For example, the housing market will crash, as it did; don’t expect these things to go on forever.

2008-10 Lessons

The following year we learned all about risk management and how to hang on to capital. In 2009 those in the know figured out pretty quick that it was “vital not to overstay a bearish stance in the face of massive fiscal and monetary stimulus, even if the economy was in a deep recession for half the year.” Just a year ago we were taught the benefit and importance of dealing with market swings and to watch out for health care and what was happening in Greece amongst other issues. This year the markets are roughly the same and there is “plenty of optimism” vis-à-vis America’s equity market giving people some great trading opportunities.

Yet there are significant risks for purchasing power this year vis-à-vis monetary matters in Ireland, Portugal and Spain and of course increasing worries that America is going to exceed its debt roof as well as increased pressure from inflation.

Some Good News

Given all this history, what does it tell us for the future? Apparently there is some good news lying ahead at least for the near-to-long-term future. It looks like there will be “stable earnings growth” in America’s economy and with higher quality equities there will be “more sustainable returns” in time. You may also want to look towards buying energy sector commodities along with precious metals “as a hedge against recurring weakness in global currencies.” It also looks like there will be growth in the agricultural sector and thus its stocks.

Putting money into corporate bonds is a good idea, particularly the high-yield sector. Check out low volatility convertible bonds as well as “capital preservation strategies that go both long on assets they like and short the ones they don’t.”

Look at Canadian dollars for investments along with “faster-growing emerging markets,” the euro zone and what is likely to happen in Japan, despite its recent disasters. The country may have been knocked but it’s still standing and here to tell the tale and is fighting back fast.

So of course there are no hard and fast rules in hedge funds and markets. But there is something to be said for looking to what has happened in these areas in the recent past and trying to predict what may happen in the future, but always with a significant dose of caution.

Where Will Rajaratnam Be?

It currently remains uncertain whether or not Rajaratnam will be taking the stand himself in his defense, but around five witnesses will be called by his defense attorneys.

Guilty Rajaratnam?

If you want to decide for yourself whether or not Rajaratnam is guilty, you can listen to the wiretapped conversation that took place between him and employee friend David Lau. Whatever the case ultimately proves or disproves, it is set to make for very interesting documentation in hedge fund history.

The GlobeOp Capital Movement Index keeps track of hedge fund flows based on the global hedge-fund industry assets managed by the company. The Index shows that those assets have grown since the middle of 2009, as investments increased following the recovery from the financial crisis.

Why GlobeOp?

Hans Hufschmid, chief executive officer, explained that the GlobeOp Index is the most accurate, as the information is autonomously verified. In general, hedge fund information and flow data providers depend on money manager reports, which are often biased.

“There is plenty of academic research that shows that data is generally overstated because when people make money and do well they contribute, but if things go bad they stop reporting,” said Hufschmid.  He added that GlobeOp will be releasing monthly updates and information in order to provide executives and investors with a clearer picture of the industry. He explained that the point of the indexes is to increase brnad recognition as well as to provide the industry with the better, more accurate data. However, they do not expect the indexes to increase the company’s profits.

The firm is currently worth $1.4 billion, and Gupta plans to take his leave as numerous sources claim that he released inside information to the hedge fund billionaire Raj Rajaratnam regarding Wall Street Bank.

Founding partner and CEo of New Silk Route Parag Saxena has explained that the chairman is departing in order to “avoid any distraction and ensure New Silk Route’s continued focus.” The New York Post quoted Saxena as saying: “We will respect Mr. Gupta’s request. We believe that he will be exonerated.”

Gupta has been cut off from six companies until now, the first resulting from the Securities and Exchange Commission’s accusations of Grupta, claiming that he tipped his partner Rajaratnam by providing him with private information regarding Goldman and Procter and Gamble.

This is one of the few industries that has been able to recuperate so quickly. LCH Investments has calculated that the top ten hedge funds alone brought in more than $28 billion for their customers during the second half of 2010. The profits of Goldman Sachs, JPMorgan, Citigroup, Morgan Stanley, Barclays and HSBC did not reach that amount, combined. The hedge fund companies themselves earned around 20% of the proceeds, plus an additional 2% for management.

Some believe that the positive turn of events comes as a result of stock markets that quickly rallied during the second half of last year. Many commodity prices also rose during that period.

“Gold has found support and buyers have been coming in in the past few weeks,” Frank Lesh, a trader at FuturePath Trading LLC, said. “All the factors driving the price of gold higher are still there- political instability, currency volatility and inflation. People are following through with their intentions after the dip in January.”

Gold has risen by 5.6% this month, following a 6.1% slump in January which resulted from an investor transfer into equities. Over the past year, prices have gone up 27%. Managed money spots include hedge funds, commodity-trading advisers and commodity pools. Analysts and investors alike watch the positions closely, as any change may foreshadow an upcoming switch in prices.  

In an interview with Financial Crisis Inquiry Commission, John Paulson said “We were very, very much in the minority. If I said a thousand-to-one, we were the one. Even friends of ours thought we were so wrong, they felt sorry for us.” He went on to say that many experts referred to him as a “novice” in the mortgage market, and said that the investment was a “misguided move.”

Apparently, Mr. Paulson drew from his personal experience in house purchasing in order to produce his billion-dollar investment scheme. His daring certainly led him to an unbelievable success.

The LIA was set up by Tripoli five years ago, following the easing of UN sanctions, with hopes of varying North African dependence on its oil capital. Because its inception was not long ago, it has not suffered from some of the losses common in other Middle Eastern assets.

“Libya’s sovereign wealth fund is more opaque than some of its peers, which is why the country has not been as active with overseas investments,” explained Ann Wyman, the head of emerging markets at Nomura.

Many of LIA’s portfolio investments were made through private equity funds. It used banks in the US and Europe to run the transactions. The majority of the fund’s assets are still liquid, and so Libya has managed to open many opportunities in Europe, the US and in numerous other countries.

So far, the LIA has a stake of 2.5 percent in UniCredit, which is Italy’s largest credit bank. They also have 4.9 percent in the bank held by the central bank of Lybia. Tripoli’s shares add up to almost 7.5 in total.

The report is 663 pages long, and it is the “final report” by the US Financial Crisis Inquiry Commission. On page 353, it says that September 15^th, 2008 was “the beginning of the worse market disruption in postwar American History and an extraordinary rush to the safest possible investments.” Page 360 goes on the say that hedge funds “pulled billions of dollars in cash and other assets out of Morgan Stanley, Merrill and Goldman,” in favor of bigger foreign banks and “custodian banks, such as BNY Mellon and Northern Trust, which they believed were safer and more transparent.”

In October of last year Morgan Stanley and FrontPoint decided to have FrontPoint become an independent firm. Two weeks later the plan was put on hold by the U.S. Securities and Exchange Commission when a French doctor was accused of providing a FrontPoint manager with confidential information regarding a clinical drug test. The firm has not been charged, but has dismissed the manager in question along with his healthcare investment team.

Steve Eisman, a manager for the firm, currently oversees $1.2 billion. He has recently shared that he may leave the firm in order to start his own hedge fund.