Emma Trincal

Try Jim Cramer's Action Alerts PLUS
CLICK HERE NOW

Seeing in the Dark

09/01/05 - 06:57 AM EDT

Emma  Trincal

Funny thing about hedge funds. Sometimes the more forthcoming a manager is, the less you want to trust him.

Connecticut's embattled Bayou Fund doesn't currently rank as a bastion of transparency, but it did once. Bayou manager Samuel Israel was famously gregarious, showering investors with information, emailing weekly performance reports and telling anyone who would listen how great he was doing. Israel trumpeted annual returns that supposedly blew away most of his peers.

Now, the shades are pulled, and Israel has shut his mouth. State and federal prosecutors are investigating what happened to up to more than $400 million of client assets that some investors worry went up in smoke.

Don't trust appearances. Most hedge funds take the maxim to absurd lengths by giving virtually no appearance to trust. While they may give occasional valuation updates (monthly, quarterly, yearly), they are under no obligation to explain their trades or to disclose their underlying positions.

In short, most hedge funds are opaque -- and that's how clients prefer it.

"The hedge fund that are good don't want to bother with transparency," says Jim McKee, a consultant at Callan Associates who advises investors on managers out of San Francisco. Good managers believe disclosure erodes returns by tipping their hand or orienting performance to short-term goals.

Top managers tell their clients, "Trust me, the less you know about your investment, the better your returns will be." In a world where the best funds become closed to new investment almost immediately, it's a covenant that usually must be accepted.

So how are investors supposed to pick winners among the 8,000 hedge funds out there? When return is a direct function of talent and strategy, the question is an important one. Too much emphasis on a manager can leave you in unsuitable strategies or undiversified, while too little can lead to poor performance or worse.

Previous «
1 2 3

Emma Trincal


08/26/05
AmEx Bucks the Hedge Fund Trend

A spinoff prompts the financial giant to retreat from the competitive, overcrowded U.S. market.


08/25/05
Delphi Revs the Bulls' Motors

Hedge funds join sell-side analysts in betting on a restructuring deal with GM and the UAW.


08/23/05
Taking a Flier on Airlines

Hedge funds such as SAC Capital can't resist the sector's high-risk, high-reward opportunities.


08/18/05
Highbridge Poaches Fidelity Manager

William Eigen managed about $10 billion at funds including the Strategic Income Fund.


08/17/05
Citi Plucks Nolte for Hedge Fund Unit

The former Deutsche Bank exec will run its fund and fund-of-funds businesses.


05/19/08
Cramer on Top Searched Stocks: Yahoo!

Yahoo! is among the most searched stocks on TheStreet.com. Here's what Cramer had to say about the stock recently.


05/17/08
Jim Cramer's Best Blogs

Catch up on his thinking on the hottest topics of the past week.


04/26/08
Coming Week: Make or Break

Investors will have to deal with a Fed meeting and another flood of earnings and economic data.


05/19/08
Top Rocket Stocks: Ensco

Ensco International and Echelon have the potential to move higher in coming days.


04/28/08
Monday's Analysts' Upgrades, Downgrades

See who made what calls.


05/19/08
Telecom Giants See a Savior in Video

The addition of video is helping telecom companies compete against cable and satellite companies.


05/19/08
Contract Expiration Tempers Oil's Rise

The June West Texas Intermediate contract reflects selling pressure ahead of Tuesday's expiration. But stocks in the sector are generally trading higher.


05/19/08
Analysts' Upgrades, Downgrades: Amazon

See who made what calls.


Your Recent Quotes: Quote Up0 | Quote Down0
Dow S&P 500 NASDAQ
Oil*
Gold
10 Yr
0.00%
%
%
%
Data delayed 20 min
Sign up for our FREE newsletters now.

Keep on top of the market and the critical information you need to make more profitable investing decisions.

  • Cramer's Daily Booyah!
  • Before the Bell

Privacy Policy

See All Free Newsletters

Premium Stock Ideas
Access Action Alerts Plus to find out Cramer’s latest picks now!