Now that I am getting out of the hedge fund business I can speak much more freely and directly about some of the more outrageous practices of our business that I think have an impact on you the investor.
For example, does your mutual fund manager run a hedge fund? Does he run one fund that pays by the asset and another that pays by performance? I wrote about
this problem a little while back and warned that I thought that a lot of the mutual fund managers -- if they ever got in trouble with performance -- would set up second funds that cater just to the rich.
Sure enough, a bunch of funds have done it. These funds are now running your money and running hedge funds simultaneously. If you are in a mutual fund where the manager is also running a hedge fund, here is what you should do:
Pull your money out.
Nah, that's a little vague:
Get your your money out now.
I don't care what kind of controls that mutual fund office has, I can tell you that the incentive for doing well in the hedge fund is so much higher than it is for the mutual fund, that the manager can't be trusted to do his best for you. I know that's a harsh charge, but it is true; the temptations will be too great to jam the good hot trades into the hedge fund because you get 20% of the gains (OR MORE!) in the hedge fund, but you are paid by the percentage of assets in the mutual funds.
Oh I can here the mutual fund managers who do this saying, "
has never seen my foolproof system for allocating trades and doing it right for both." To which I say, that's right I haven't -- because there is no such thing.
I don't make the rules, I just follow them, but if I were in government I would make managers declare either the hedge fund or the mutual fund business. The compensation structures are just too different -- and the hedge fund gains are too tempting -- to believe that the public can be protected from less than evenhandedness if their money is in the mutual fund.
Do you ever go to
? If you don't, you are missing out on one of the great treats of a lifetime. I won't bore you with all of the great things at that site. I will tell you that my colleague and head trader,
pours his heart out every day for that site in the form of an outrageous trading diary that is worth the price of admission.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in any stocks mentioned. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to send comments on his column to
James J. Cramer.