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The hedge fund industry has been eating humble pie for the better part of the last 10 years. Funds in aggregate have underperformed the stock market over that period. If you look at just the period that coincides with the financial crisis, the average hedge fund fared well, posting much smaller losses than the main stock indexes. Of course, that's how it's supposed to be. And performance over that period doesn't count for much now.

The reality is that hedge funds have lowered their expectations and are trying hard to goad potential limited partners to do so as well. Many in fact welcome a discussion about everything but performance.

The silver lining is that the industry today is healthier. High-quality global journalism requires investment.

"There are far fewer marginal hedge funds out there because we have gone through a period of really culling the herd," one expert told the Financial Times. "A lot of the people who didn't know what they were doing have been put out of business or folded up shop."

It does seem like more funds are interested in mere survival, more so than swinging for the fence. And that may be a good thing, especially for the institutions that aren't necessarily demanding SAC Capital-like returns. They would rather have steady performers, year after year.

Many funds nowadays deem that audience vastly preferable to wealthy families who still seem to want massive, market-crushing gains. In this corner of the market, skepticism of the hedge fund industry as a whole seems to be gaining.

"The result is a calmer, if less lucrative life, both for hedge fund managers and their investors," according to the FT.

While the industry may be more staid than a generation ago, it's just as competitive. The lion's share of new inflows goes to just five percent of all hedge funds. For the remainder, the fight for scraps is bitter indeed. In the end, performance does matter. And if you have a good performance story to tell, in addition to all the non-performance stories that you have to tell to attract inflows, you might find yourself in good shape. -Jim

Read more about: family offices
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Today's Top News

1. Meredith Whitney still a lightning rod

By Jim Kim

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2. Lloyd Blankfein delivers commencement address

Meredith Whitney achieved wide acclaim for her prediction back in 2007 that Citigroup would be forced to suspend its dividend. Her career arc adjusted upward and she ended up a huge media personality. But her inflated call on the harms that municipal entities would suffer led to lots of scorn that continues to dog her.

She has just released a book, "Fate of the States: The New Geography of American Prosperity," which predicts that the country's "central corridor" is going to drive the economy for decades to come.

But the reviews have hardly been kind.

"Now Whitney, with a barrage of numbers, percentages, gross generalization, bald assertion and outright error, joins the ranks of the demographic determinists," according to Bloomberg Businessweek. It goes on to say, "Whether we will all move to Kansas is debatable. What isn't are the factual errors on display here."

Muniland writes: "It felt like the book had been written over a year ago and was not in tune with current fiscal realities. For example, on page 117 Whitney says, 'We have reached a breaking point for some states. There is no more money.' The only state that I know where that might apply is Puerto Rico. In fact, numerous states are seeing modest surpluses this year and some are rebuilding rainy day funds."

In the end, Whitney has brought another big heap of scorn onto her head. She, perhaps, would have been better off not publishing this book. No matter how much she wanted to fight back against those who pilloried her earlier.

For more:
- here's the Bloomberg Businessweek article
- here's the Muniland item

Read more about: Meredith Whitney
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By Jim Kim

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3. How long will the SAC Capital saga go on?

Goldman Sachs CEO Lloyd Blankfein continues to pave the way for a transition from the pre-eminent financial services executive to whatever comes next. Many people were convinced that he was primed for a move into public service, but the environment to tap big bank execs for such jobs remains unfavorable and Blankfein would appear to be a victim.

Still, he has been in statesman mode, staking out very reasonable positions on regulatory affairs, positioning his bank as a gay rights activist, and generally running clear of anything controversial. The good-guy campaign stepped up again when he delivered a commencement address at a local community college.

DealBook notes that Goldman Sachs chose LaGuardia in 2010 as a partner in the firm's 10,000 Small Businesses program, which aims to train entrepreneurs. The president of LaGuardia called Mr. Blankfein a "stalwart supporter of small businesses and community colleges."

Blankfein's address will not go down as one of the great commencement speeches in the manner of a Conan O'Brien's speech at Harvard a few years ago. Still, he told his own tale of success against the odds, one that will likely be deemed inspiring.

"What are the chances that a kid from the projects would run one of the great financial institutions in the world?" Blankfein was quoted. "You just never know."

As of now, we don't know what's next for Blankfein, but the window is wide open for a graceful move.

For more:
- here's the article

Read more about: Goldman Sachs, CEO succession
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By Jim Kim

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4. CalPERS to cash out of private equity firm stock

Prosecutors looking into potential crimes by Steven Cohen and his hedge fund firm SAC Capital face a couple of pressing deadlines. Five-year statutes of limitation on charges related to two drugs stocks and on Dell will expire in July and August. So it's tempting to think that the saga will soon end. By the end of the summer, either charges against Cohen or the firm -- or both -- must be filed.

But Reuters notes that while investigations into these two cases will play out, there are other investigations with statute of limitations deadlines that stretch much farther into the future.

It notes that, "Based on the five-year statute of limitations on insider trading charges, probes into potentially improper trading in Weight Watchers International in 2011 and InterMune in 2010 give prosecutors until 2016 to make a case."

So even if prosecutors do not bring charges related to Dell and Elan, "a legal cloud could continue to hang over the 56-year-old manager and his firm for some time."

The mere hint of continuing enforcement trouble may be enough to keep potential limited partners away, assuming the fund continues to invest for others.

It's unclear if the Weight Watchers and InterMune investigations are delivering indications that prosecutable crimes were indeed committed. The prosecution just might have information that has yet to be released to the public. It's unclear as well whether these two trades can be linked to Cohen himself.

The best guess here is that the drug stock trades and Dell trades represent the best chance to prosecute Cohen. My sense is that, barring a cooperating witness, such charges still seem unlikely. Charges against the company, either criminal or civil, however, will be easier to bring.

For more:
- here's the Reuters article

Read more about: insider trading, SAC Capital
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By Jim Kim

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5. Bank of America once prepared to put Countrywide in bankruptcy court

If you're a big pension, you can invest as a limited partner in specific private equity funds, or you can increasingly invest directly in the stock of publicly traded private equity companies. For CalPERS, the latter strategy has paid off, as it plans to exit investments in the stock of Carlyle and Apollo.

CalPERS acquired a 5.5 percent stake in Carlyle in 2001 for $175 million, though offer stock distributions diluted its share to 4 percent. In May 2012, Thomson Reuters Buyouts Magazine reported CalPERS had until that point taken in $225.2 million in carried interest, fees and distributions from its Carlyle stake, based on a California Public Records Act request. Accounting also for Carlyle's distributions as a public firm since May 2012, CalPERS "stands to make close to 3.5 times its money on its Carlyle stake investment over a period of 12 years," according to Reuters.

As for Apollo, CalPERS along with the Abu Dhabi Investment Authority invested a combined $1.2 billion in Apollo about six years ago. Each will now offer shares worth about $203 million. The stock has been on fire as of late, offering a good time for stock holders to cash out.

Indeed, insiders are planning to cash out as well. Marc Rowan and Joshua Harris, who co-founded Apollo with Leon Black, are planning to sell their stake, worth up to $120.1 million and $60.1 million respectively. That's about 7.5 percent of Rowan's stake in Apollo and 3.7 percent of Harris' stake. Black is not selling any of his shares. Ten other Apollo employees are selling about 2.6 million shares.

For more:
- here's the article

Read more about: Private Equity, pensions
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By Jim Kim

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