Monday, September 10, 2012
The first thing that surprised me about the OZM presentation was that it was under 20 mins. OZM is a hedge fund manager. In essence they manage $30 billion dollars and can sell shot as well as buy. This is about the same amount of money Mobius manages and they mention China and Sovereign funds, same as Mobius. But they are not limited in any way. Mark is buying Emerging Market funds only. In this presentation you will learn about Hedge funds.
To neutralize the effect of overall market movement you can balance your portfolio by buying assets whose price you expected to increase, and selling short assets whose price you expected to decrease. “Hedged”, is a Wall Street term, to describe how the funds manage to hedge risks from overall market movements. This type of portfolio is known as a hedge fund.
This presentation like that of Kinder or Apple, is not about OZMs share price, except a comment in conclusion. The focus of the presentation is about the hedge fund business, what they do, but not how they do it. You can hear the concerns of money managers which these guys are. If I had been the son of a Banker I might have been doing the same thing all these years. I know Jamie would have wanted to. Fortunately I got a better deal and just have to live on less than I have coming in.
A hedge fund typically pays its investment manager a management fee, which is a percentage of the assets of the fund, and a performance fee, if the fund’s net asset value increases during the year. A “fund of funds” is a fund that invests on other hedge funds rather than investing directly in securities and other assets.
Kinder Morgan pipelines is what we use to call a defensive stock. When I was starting out utilities and grocers were stocks that paid a steady income no matter what the market was doing. AT&T use to be a defensive stock for people long dead now. Kinder’s word is *accretive,* every asset he buys will pay it self off, and be accretive immediately to the current dividend payout. All new deals have a positive cash flow. The dividend will pay more than it did before, irrespective to the price of the commodity, or the securities market price. It offers a defense against bear markets.
Hedge fund management is a different deal. In down markets for the funds, there will be no incentive fees. So the management will be good if it can pay all of its expenses and have enough left over to pay out anything from management fees. In the automotive business they can go for many years running at a loss. But if the hedge fund manager can work within his 2% and keep the pile big enough so the 2% covers costs, he might still pay something out in down quarters.
But in a Bull market, the fees earned on the amounts under management not only will increase, but the incentive 20% performance fee kicks in, and then there are real profits. Like an after burner on space craft, or a Turbo on a Porsche. This 20% of the profits on the whole pile is paid to OZM, who passes them on to shareholders as dividends. Daniel Och the founder of OZM say’s the ability to outperform during down months is what attracts new money to the fund. More money in, more fees collected.
Besides performance, this chart shows the same goals we want in mutual funds. Global, limited leverage, diversification.
This is where the money comes from, assets under management (Aum).
Why institutions say they use hedge funds.
New money coming in is skipping the fund of funds.