GUEST AUTHOR BLOG by Simon Lack, author of "The Hedge Fund Mirage: The Illusion of Big Money and Why It's Too Good to Be True."
Does anyone on Wall Street really, truly care about the customer anymore?
It should be an oxymoronic question since where would the financial sector be without clients to invest in, issue and trade the securities it manufactures. If clients didn’t need advice on acquisitions, or on how to invest their money, the world across the Hudson River (or within the “square mile” in the UK) would be very different. And yet new examples of self-interest, of clients losing, occur everywhere.
Take hedge funds for example.
Recently I published a book "The Hedge Fund Mirage" which reveals how poorly investors have done with these somewhat mysterious but lucrative vehicles. It turns out that investors in aggregate would have been better off in riskless treasury bills than trusting their money to masters of the universe.
The overall profits have been split 98:2 in favor of the industry.
The book is intentionally provocative, with the hope of goading clients into more assertive negotiations before they part with their money. Investing allows for quantitative measures of performance, and since my book includes both figures and methodology others can recreate my conclusions or find fault in them. Industry reaction has been muted – most hedge fund managers don’t care because they secretly think their peers are largely incompetent, but representatives of the broader hedge fund universe might be expected to respond.
As indeed they have.
The Alternative Investment Managers Association(AIMA) is headed by Andrew Baker. Mr. Baker stepped into the breach to suggestthat my book was, “…neither new nor devastating.” From which one might deduce that poor results for investors ought to be an accepted fact. Mr. Baker did later refer to some marketing materials (from a hedge fund of funds manager) to show that things weren’t as bad as I thought, but so far AIMA has not offered a response that includes numbers.
Recently the BBC World Servicebroadcast an interview with me on the book. Steven Bell, of London based hedge fund GLC UK, was invited to respond. I should point out here that one of those damage control firms that advises large corporations how to respond to, say, a sudden recall of baby formula would by now have advised the hedge fund industry to quickly acknowledge the mistakes of the past and immediately move the debate to how the future will be different. However, no such PR firm has been hired, and so Mr. Bell bravely offered that the 98% of the investment profits taken in fees by hedge funds was really no different in other asset classes.
His defense is like that of the Halloween trick-or-treater taking three pieces of candy from each house - everybody’s doing it.
"Whether Mr. Smith is right or not, today’s financial services industry is developing an unfortunate talent for shooting itself in the foot."
Fortunately, while other asset classes may also be guilty of delivering less ultimate value than they should, there is no research I’m aware of that supports the “We’re all as bad as one another” response. However, both AIMA and Mr. Smith are relying on this rather unappealing conclusion as justification for business as usual.
Greg Smith, now notoriously ex-Goldman Sachs , has shone an unflattering light on his former employer just when attention had drifted elsewhere. His brave op-ed in The New York Times will no doubt consume substantial senior management attention in the weeks ahead. A twelve year career which included actively recruiting for the company has culminated with the damning assertion that clients no longer matter to Goldman. Although we don’t know muchabout Mr. Smith, so far nothing has been offered to contradict an image of this loyal proselytizer for Goldman’s culture bitterly concluding that the values he treasured have withered under the pursuit of trading profits.
Whether Mr. Smith is right or not, today’s financial services industry is developing an unfortunate talent for shooting itself in the foot. As banks, brokers, financial advisors and hedge funds move farther away from the concept that the financial sector exists to service the rest of the economy, we may expect the non-finance end of things to respond in ways not wholly to our liking.
About the author: Following 23 years with JPMorgan, Simon Lack founded SL Advisors, LLC, a Registered Investment Advisor, in 2009. Much of Simon Lack's career with JPMorgan was spent in North American Fixed Income Derivatives and Forward FX trading, a business that he ran successfully through several bank mergers ultimately overseeing 50 professionals and $300 million in annual revenues. Simon Lack sat on JPMorgan's investment committee allocating over $1 billion to hedge fund managers and founded the JPMorgan Incubator Funds, two private equity vehicles that take economic stakes in emerging hedge fund managers.