The ‘Smart Money’ Ain’t So Smart Anymore

Not long ago it seemed that the “smart money” was invested in hedge funds which generated outsized returns for investors. When broad markets fell by 40% in the crash of 2008 and 2009, hedgies like John Paulson, who bet against mortgage-backed securities, made fortunes. In 2007, Paulson made $3.7 billion. In 2010, he made $5 billion.

Now that the financial crisis has abated, such returns for Paulson and his fellow superstar hedgies appear to be a thing of the past. And, with the recent rash of insider trading prosecutions by the Feds against hedge fund managers, investors must seriously question the value of putting their money with these folks.

The saga of SAC Capital may ultimately show that the only reason hedge funds realized the outside return was through illegal insider trading on confidential information. And the bad news around SAC and its manager, Steve Cohen, continued to get worse over the past week.

Investors are waking up to the fact that the former hedge fund emperor Cohen truly has no clothes, and that could spell a disaster for the $2.3-trillion industry.

Now, investors want out – desperately, it seems – from Cohen’s funds.

The New York Post’s Kaja Whitehouse on Tuesday reported that a group of investors wants Cohen and SAC Capital “to fork over nearly $1 billion – cash the hedge fund giant earned by trading on alleged inside information of drug company Elan Corp. Remember, SAC settled earlier this year with the Securities and Exchange Commission for $602 million for such alleged insider trading.

And according to a report in Friday’s New York Times by Peter Lattman, Cohen is “fighting to keep” clients. Cohen must be pining for days past, when he turned new business away.

The tarnishing of other rock star hedge fund managers such as Bill Ackman, who made the disastrous pick of JC Penney, shows that the bloom is officially off the rose with these fund managers.

So what have hedge fund investors been receiving for their payment of 2% of assets and 20% of returns? The answer is subpar investments.

A new study shows that in the past year, hedge funds increased 6.2% compared with 13.4% gain for the S&P 500 Index, according to David Weidner of MarketWatch. This year is no better with the hedge funds doing about 5% for the first quarter of 2013 compared to a 10% gain for the S&P 500 Index.

So how do the hedge funds pick up the pace? Will hedgies more and more rely on insider trading? Will they show up more and more on CNBC and other news outlets to hype stocks? Or will today’s old Masters of the Universe simply disappear like the thousand hedge funds that have closed their doors over the past 3 years?

Hedge fund investors beware, the “smart money” ain’t so smart anymore. In fact, it’s looking kind of dumb.

Zamansky & Associates are securities fraud attorneys representing investors in federal and state litigation against hedge funds and their managers.

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About Jacob H. Zamansky 58 Articles

Jacob (”Jake”) H. Zamansky is one of the country’s foremost authorities on securities arbitration law, the legal recourse for investors claiming broker wrongdoing, or for brokers claiming wrongful termination or other misconduct by their employer. Zamansky & Associates, the New York-based law firm he founded, represents both individuals and institutions in complex securities, hedge fund, and employment arbitrations.

Mr. Zamansky was at the forefront of recent efforts to “clean up” Wall Street. In 2001, he successfully sued former Merrill Lynch analyst Henry Blodget on behalf of a New York pediatrician misled by Blodget’s stock research. The case’s successful resolution was the catalyst for New York Attorney General Elliot Spitzer to investigate the conflicts of interest on Wall Street and resulted in the well-reported $1.4 billion Global Settlement, which included many of the biggest names on Wall Street.

More recently, Mr. Zamansky is one of the leading litigators and opinion leaders of the subprime mortgage crisis and the related hedge fund collapses, representing both investors and mortgage borrowers who were defrauded by Wall Street firms and mortgage lenders. Among Mr. Zamansky’s early actions is filing the first arbitration case on behalf of institutional and high net worth investors against Bear Stearns Asset Management with regard to the two hedge funds which collapsed as a result of exposure to subprime mortgage backed securities. He also has filed claims on behalf of individual investors victimized by brokers that steered their portfolios into unsuitable subprime stocks and mortgage borrowers who were fraudulently coerced into inappropriate mortgage and investment transactions.

Earlier in his career, Mr. Zamansky worked for more than 30 years as a litigator, including positions at Skadden Arps, Slate, Meagher and Flom LLP. His tenure also included serving as a federal prosecutor with the Federal Trade Commission.

A native of Philadelphia, Mr. Zamansky has been a frequent expert commentator on CNBC, CNN, and FOX News and has published opinion pieces in The Wall Street Journal, Financial Times and USA Today. He is regularly quoted and his cases have been chronicled in major financial and news publications including The New York Times, USA Today, The Washington Post, BusinessWeek, Fortune and Forbes. He is a frequent lecturer for industry and legal groups around the country. He also writes a blog that can be viewed here.

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