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Did Alan Bond keep the best trades for himself while giving the dregs to his clients? In the current prosecution of this once most visible fund manager, Bond's lawyer argued yesterday that Bond simply took more risks with his personal account than he did with his pension fund money and it paid off big for him. The government, however, says he cherry-picked the best trades for himself and gave the worst ones to his investors.
What really happened here?
I believe that Bond kept the best trades for himself and cheated his partners. But more important for every other investor in this market is the question of what the heck Bond was doing with a personal account to begin with. Couldn't he make enough money being on the same page as his investors? Why did he have to augment his income with personal trading when he was running millions? The chances of conflict are so great he never should have been allowed to have that personal account.
Personal accounts are just plain wrong for money managers. Managers' personal assets should be on the exact same page as the investors' assets. I have no doubt that the prosecution will prevail in Bond's case; the losses for the investors were too great, the gains for Bond personally too large.
But the thing you should care most about is whether your money manager has another gig going besides your own.
Why is it so bad? Simple. In a volatile market there always will be trades you can do on a given day that will result in quick profits. If you have any account other than your partners', you might be tempted to put those great daytrades in that account.
That temptation alone is the real reason
to allow this type of dual loyalty.
If you are an investor in a hedge fund where you can talk to the manager, I would ask him today if he has any side accounts and if he does, why he doesn't close them. If you have money with a mutual fund, ask that fund's representatives what the personal account rules are. If they are allowed, it might be a good reason not to do business with that manager.
Unfortunately, stuff like this is shrouded in secrecy. Funds don't talk about their policies either because they haven't thought about it or don't think it's important.
If Alan Bond is found guilty, though, I think you will find the situation changed overnight. Personal accounts will be banned.
Don't wait for the banning. Ask now, pressure now. In all the years I managed money I never once did a trade for my personal account. I never allowed anyone to have a personal account. The chances of someone benefiting at the expense of my partners, my fiduciaries, were just too great. Don't give someone the chance to be "Bonded." Pull out if there is an account that is more valuable to your manager than your own.
situation stinks so badly, yet I can see the people at Ernst & Young arguing that they were just doing what everyone else was doing. Indeed, that is the problem of the last few years: The "custom" of the era got out of control. But think back to the '80s. Lots of people argued that insider trading was pretty much the custom. They went to jail. Now insider trading is something that everyone expects to go down for. That's how these conflicts will look in a few years. ... The notion of gold as an investable class still rankles me given the muted inflation outlook, but it sure is understandable given that it holds up well in a post-thermonuclear environment. But, and I am not being facetious, do you?
James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made.
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