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The Rich Get Richer...without using any skills whatsoever

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June 24, 2010 – Comments (8)

My company's office building is in an affluent area.  A number of small hedge funds have offices there as well. I have a tremendous amount of respect for most of them...the quant funds that develop their own formulas in an attempt to beat the market or the smart stock pickets, even the intuitive traders.  

There is one hedge fund that represents everything that's wrong with this industry.  The boss there intentionally smokes cigars in no smoking sections of the building and tears around the parking lot in Lamborghinis and other exotic cars.  From what I can tell very little work ever actually gets done in their office.  They are constantly screwing around, literally injecting each other with steroids (I'm not kidding).  The people there do not seem to have any discernible skills.

You may ask then, how do they make money?  I can tell you in one word...connections.  Here's an example of how they make money.  The bead honcho at the fund was bragging to a group of people the other day about how he can't wait for the General Motors IPO.  He's not a big fan of the company, oh no.  He knows people who will enable him to get a huge chunk of shares of the company in the offering that is scheduled to launch this fall.  He then plans to quickly flip those shares in a matter of minutes to foolish (with a small f) retail investors who bid up the initial price in their frenzy to hop in for a huge profit.

It blew my mind that a fund like this has access to shares in what essentially is a government-sponsored IPO before the general public.  That's just not right.  Uncle Sam uses our tax dollars to save GM and then somehow leaches like this are able to bid up the prices that the very same taxpayers who saved the company have to pay to invest in the company.

I have a tremendous amount of respect for most hedge funds.  Many of them are filled with impressive individuals who use skill to pick stocks that will outperform the market.  It's leaches like this that have no skill and add no economic value whatsoever that give the industry a bad name.

That's the end of my rant.

Deej 

8 Comments – Post Your Own

#1) On June 24, 2010 at 7:09 AM, OneLegged (< 20) wrote:

I thought front-running was illegal?  Turn him in.

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#2) On June 24, 2010 at 8:04 AM, lemoneater (79.39) wrote:

I hope a lot of potential GM investors read this blog. Thanks for the warning. This sounds like something the somewhat ineffectual SEC should target. Evidently, this Company's mission statement is "a sucker is born every minute."--P.T. Barnum.

(Why anyone would want to exponentially increase their risk of a heart attack by taking steroids unprescribed is beyond me. )

Have a good day, Deej. If you have a chance, go to a farmer's market, look at all the beautiful fruit and flowers, and buy some for your mother, or wife, or some special person in your life.

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#3) On June 24, 2010 at 9:44 AM, TMFDeej (99.40) wrote:

I'm not a lawyer, so for all I know this sort of activity could be perfectly legal.  Regardless, it certainly is scummy.

I could turn them in, but in every decision I make in life I ask myself one question first...how would my family benefit or be hurt by my actions.  My wife and children come before everything else.

So, how would they benefit from me turning this fund in if this is indeed an illegal activity?  They wouldn't, unless there is some sort of reward...which I doubt.

Could my family be hurt by my turning thus fund in?  They could be if someone there or someone that they are associated with is some sort of psychopath who comes after them or me.

It is wrong?  You bet if this is happening the way I think it is, but we're not talking about some sort of Madoff like scam that will ruin thousands of people.  In that event I would have to do something.  This is just someone who is skimming a few bucks off of the top.  

The cost / benefit analysis leads me to vent about the situation, but not do anything about it.  Some may criticize such a move, but I really don't care.

Besides venting, the purpose of this post was to warn others not to blindly hop on board IPOs once they begin trading.  

Let's take a look at the recent CBOE IPO.  Its stock officially priced at $29/share, yet at one point on the first day of trading its shares soared more than 16% as the leaches who received huge blocks of shares in the offering sucked in retail investors.

The stock subsequently fell from $32.50 on the first day to $31/share a couple of days later.  Anyone who avoided the initial euphoria and waited a little while got a much better deal.

Of course the stock is now trading at over $33/share so even the people who piled in on the first day came out alright, but that certainly is not always the case.

If I was really interested in a stock that is having an IPO, I would try to get in on the initial offering or wait until the smoke clears unless I was absolutely positive that the stock was a steal at the level that it was trading at on its first day.

IPOs often aren't even that good a deal for investors.  If private equity selling a company that it owns in an IPO, there may be a reason.

According to an article on CNBC, "So far this year, initial offerings by private equity funds have fallen 4.4 percent in their first month of trading, based on data through May 25, according to the IPO-tracking firm Renaissance Capital. " 

Deej 

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#4) On June 24, 2010 at 2:38 PM, rwebankrupt (78.47) wrote:

This is not front running

This is not illegal

Sophisticated supply + unsophisticated demand = profits

They are encouraged and wealthy because the Federal lawless lawmakers reward those who do not have a moral compass.

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#5) On June 24, 2010 at 7:25 PM, QualityPicks (55.60) wrote:

GM IPO may be good or bad for the retail investor. These guys however will risk nothing. They will go for the sure thing and just flip their shares at the open.

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#6) On June 24, 2010 at 9:50 PM, walt373 (99.80) wrote:

This is probably how most successful hedge funds make money - connections. I just finished reading Jim Cramer's book Confessions of a Street Addict, and if you read it, you will see what I mean (it's pretty good read). They basically play in that gray area that's almost front-running or insider trading.

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#7) On June 25, 2010 at 12:46 AM, Tastylunch (29.21) wrote:

Cronyism

got to love it.

You know I wonder, if modern communication technology is an accelerant  for making this ever present age-old worse.

Email, cells, twitter etc makes it a little easier to "reach out and touch someone" as AT&T used to pitch.

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#8) On June 25, 2010 at 3:42 AM, rwebankrupt (78.47) wrote:

Here is a great example how modern technology helps

Who won what in Colombia oil lease bids

companies still have not put out statements

http://www.rondacolombia2010.com/imagenes/news/6f3_resultadosFinalesporTipo.pdf

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