For Our Cringe Worthy Post Of The Day

I literally cringed when I read this article on Bloomberg.  I am not sure why our DNA hasn't adapted to fight against the greed that seems to totally blind us to the fact that when something is too good to be true, it is.  The article tells the story of a hedge fund in Atlanta that has generated returns of 13, 24 and 91% since 2013.  That's not all, as you read further you find this:

Meyer is so confident in his approach that he offers an extraordinary guarantee: With Arjun, you will never lose money. His price of admission is steep, however. Investors must hand over their cash for a decade. If they exit early, Meyer keeps half the principal.

If that isn't enough to make investors run, here are some more pieces of data:

  • He has no employees
  • A computer comes us with the trades, since he can't "manually do something like that"
  • He's been through 3 auditing firms
  • There are irregularities surrounding how much money they manage (anywhere from $39 million to $338 million)
  • No one seems to be able to explain how he earns these returns
  • He doesn't send audited financial statements to his investors
  • He invests in treasury bonds, which are yielding almost nothing today
  • Oh, last one…he's under investigation

But still, you have some of his investors making comments like this:

David Recknagel, a sales executive in Detroit, met Meyer when the money manager was doing consulting work. Recknagel says he invested in Arjun after losing confidence in big banks and money-management companies. He concedes he’s not sure how Meyer does what he does.  “I understand it in general, but I probably don’t understand it completely,” Recknagel says.

One more quote from another investor:

Jeff Roberts, who runs a real-estate appraisal company in Asheville, North Carolina, says he met Meyer in 1989, while the two were at First Union. They became friends after Meyer, wearing jeans and a T-shirt, turned up one day in a Ford pickup to give Roberts a lift. A 12-pack of Budweiser rested on the front seat. Roberts says he’s invested several hundred thousand dollars and Meyer has been great.

“How many hedge-fund managers can you get to call you back? The guy that’s actually the investment officer or, you know, chairing the fund? It just doesn’t happen," Roberts says.

Roberts and Recknagel say they’ve also enjoyed a Statim perk: Meyer extends inexpensive short-term loans against their investments. Recknagel says he’s used the money to invest even more with Meyer. He says he also has a Statim corporate American Express card.

I truly hope that my instincts aren't validated, but I would venture to guess that this article could be the beginning of the end for this hedge fund.  While it seems like common sense, here are some tips to make sure your investment advisor isn't running a scam:

  1. Make sure you fully understand the investment strategy your advisor is using with your money
  2. Check out your advisor on the SEC and FINRA websites- you can check to see if they have any disciplinary history
  3. If it sounds to good to be true, it is.  There is no free lunch when it comes to investing.
  4. Make sure a third party custodian holds your money if you are working with an independent advisor.  Using a Fidelity, Schwab or TD Ameritrade can prevent the outright fraud that can happen when an advisor commingles his client's assets

If it walks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.  For the investors in this hedge fund, I think they are going to find out the hard way.

 

 

Keep Your Politics Away From My Portfolio

The Presidential race is heating up and both sides are preparing for battle.  Republicans and Democrats alike will tell you that if they don't win, the country will be in for a horrific four year stretch.  The county's populace seems to be just as divided with politics as polarizing as ever.  While conventions, stump speeches, and political scandals may be great for the news media, a recent study has come out confirming our long-held view:  politics have no place in portfolios.  Researchers studied the returns of hedge fund managers that supported Republican candidates after Obama was elected.  The results weren't pretty:

Upon closer inspection using monthly regressions, we find that the Democratic managers outperformed the Republican managers from December 2008 to September 2009 by approximately 7 percentage points annualized return, which conversely is a high price paid by Republican managers and their clients to maintain a consistency of beliefs.

You may think if a certain candidate gets elected this country is going down the tubes.  Hopefully, you continue reading this article, step back from the brink, and don't make any changes to your portfolio.  None of this is meant to say that Republicans or Democrats are better for the economy (or as managers).  What we are saying is that who is in office has very little impact on stock market returns.  Studies have found this to be case, but investors still seem to entangle their political beliefs with their portfolio.  One of the reasons given in the paper for the underperformance of the Republican hedge fund managers was the idea of cognitive dissonance.  The Cognitive Dissonance Theory states that individuals tend to seek consistency among their beliefs and opinions (ask yourself what type of news you watch or articles your read).  When inconsistencies between facts and attitudes don't match, our unconscious works to either change our beliefs or silence the facts.

When it comes to investing, it is best to ignore politics.  In almost all cases, they have very little impact on financial markets.

Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.