Did Blackstone Sponsor Insider Trading?

The past is often an indicator of the present and even of the future! 

Or simply the reverse and, may not be at all indicative of anything - à double entente! The point being: the title of this Loud Calumny post could equally have been “Does Blackstone Sponsor Insider Trading?”

Fund Portfolio Management - FPM, examines the increasingly accepted normality of "systemic corruption in corporate and political activities", and which the mainstream media  labels as “crony capitalism”.  A public induction information or label which grossly understates the scale of fraud, theft and malfeasance in the name of economics, by a cabal of business leaders. The deduction from such misrepresentation in the media is  that the beguiled public believes that this is the natural corrupt state of ethics in business. FPM prefers the nomenclature "Sickly Paradise", for the current mode of collusive capitalism referred to as technically as "oligarchies".

The damning evidence for this systemically rigged aspect of international economic life is through understanding the latent double-meanings in financial services, particularly nowadays.  Looking at a period of the last 30 years and inspecting the advent of financier billionaires, FPM have tracked and listed many purely self-serving professionals (and implicitly professions too), that are organised in society as worthwhile liquidity financiers for the public good (see relevant list below of the 5 billionaires at just Blackstone Group, which was founded in 1985 - 30 years ago!).

Public Reputation is a media-hyped generalisation to respect that these listed and other billionaires made money legitimately through industry skill luck and whatever else to succeed. The misused corporate intelligence by mainstream media is simply the requisite "organised lying" by various classes of mercantilism. This organised lying extends to the profession of government and politicians, who by their complicity as legislators condone and even perpetuate duplicitous activities. The stark “wealth inequality” in society in the new millennium is concomitant of this sickly paradise of billionaires.  FPM revealed the embodiment of this “sickly paradise” in its enterprising examination of Blackstone Group (BX) and S.A.C. Capital; the latter hedge-fund-sytematic cheat is abbreviated to "S.A.C." henceforth.

Even after the multi-billion dollar legal settlement with the government authorities in winter 2013 for a guilty corporate criminal conviction, Steven A. Cohen still has not, and probably cannot, be indicted on criminal charges. His management of an organisation culture manifest with insider trading suspicions since at least 1992, formerly bearing the initials of his full name, S.A.C. Capital, is much benignly reported in the sycophantic journalism of mainstream media. Mr Cohen's embroilment  in insider-trading allegations stem from as far back 1985, as alleged by Patricia Cohen, his former wife - she effing should know! S.A.C. changed its name to Point72 Asset Management after its guilty-plea and record penalty-fine conviction; a superficial makeover representing a shallow marketing and re-branding exercise. Done in complicity with #msm and #PublicRelations duplicity. Part of the main-name re-branding is "Point72", which is actually based on its current address! And would you believe it, S.A.C's address is and was, 72 Cummings Point Road, Stamford, Connecticut.

General Ethical Digression: This symptom of “too-big-to-jail” (as headlines satirically underplay), speaks hideous volumes of the protagonists’ natures and their ethical modus operandi in financial services, and extended organisations, if told in the context of reputation and calumny. Especially following that the decade long multi-agency investigation and legal prosecutions  turns out in the main to be a dumb-show of reprimanding white collar financial perpetrators for the cause and public-cost of “The Great Recession”. A public cost which imposed austerity instead of prosperity on the majority of the taxpaying population. The explanation of this dubious empty tactic is embedded in the political atmosphere of the day, where the tag “politicianRcriminals” seems highly appropriate. This latter aspect of crony capitalism is relevant, when considering that the President of The U.S. (#POTUS2016) elections is in November this year. American primaries or caucus for the nomination of the respective party leaders is currently underway.

In respect of serving the public interest - which is the genuine part of FPM’s mission and aim - the worst possible ending to a decade long investigations and prosecutions for insider-trading illegality / fraud and conspiracy has come about. This is the 30-years carry-on of excessive capitalism, mentioned as the sickly paradise, or corrupt crony capitalism, and elaborated with an inaugural case-in-point enterprise.

Back to our case-in-point protagonists: Not only that a civil liability proceedings was the only punitive action against the targetted kingpin of this era's insider-trading enforcement, Mr Cohen as a reputed "Artful Dodger", has been given a mere proverbial “slap on the wrist” by the regulator and U.S. Justice. Government funded regulator of the securities laws in America, the Securities and Exchange Commission - S.E.C, in conjunction with Department of Justice - D.O.J. and even the Federal Bureau of Investigations - F.B.I. have all been expediently outwitted by the "Disgracefully Dubious Coign". View below and disseminate electronically the FPM poster showing Mr Cohen's public reputation, awarded 20th Jan 2016:

Does the occasional multi-billion settlement compensate for the systematic fraud that creates 1% of billionnaires while 99% wallow in austerity and debt-servitude? There is name-and-shame reprisals if not the furore of the public revolution still to face. Watch this space. For financial operators playing within the written rules of the zero-sum investments game, this “slap” is hardly appropriate for the grand larceny in the conduct of investment management, that S.A.C Capital admittedly conducted. Some real-money equity traders know their positions were shafted by illegal confidential information - right?

To date, the greatest future detriment to the long-term-saving publics' portfolios (pensions, endowments, sovereign wealth funds etc), has been that in this era of insider-trading crackdown, the law has been made EASIER to commit IT, of course without being caught. S.A.C. has been caught and punished for some USD$ 2 bn, yet Mr Cohen its undoubtable orchestrator is scott free, and has reportedly net worth of approximately, USD$ 10 bn - astonishing!  Is that the cost of a firm willing to sell their employees' souls to the devil, and for potentially doing some jail-time?! (Ed note: I do mere over-time when working, that's all!)

Preet Bharara, representing U.S. justice and acting as district attorney for Manhattan in this era of enforcement, is the running parody that FPM dub “The Punch and Judy Show”. The Department of Justice – DoJ in the U.S., have now had their numerous convictions and jail sentences for insider trading being vacated / quashed. The exoneration of insider-trading perpetrators,  yet earlier judged and convicted in U.S. Court proceedings, demonstrates disproportionate justice in financial services as at a historic low, not to say farcical shambles. Acquitted on a technicality of insider-trading laws, include S.A.C. heavyweight honcho Michael Steinberg. The other small fry at S.A.C. who is serving time for his crime is Mathew Martoma.

In the era of insider-trading investigations following the TMT-bubble crash at the turn of this century, Arthur J. Samberg, founder of Pequot Capital Management, and others were prosecuted largely on circumstantial evidence, given that insider trading by its ambiguous nature is difficult to prove. Read more of this historic account in New York Times from 2006: S.E.C. Is Reported to Be Examining a Big Hedge Fund. Again, remarkably some 30 or so years ago, these hard working Jewish coterie (See picture below, Dennis Levine later), actually served jail time as senior executive financiers in that era of insider-trading rackets. Lady Justice worked then, sadly she has nowadays been bought and paid-for!

Insider Traders Properly Punished in 1986 - left to right: Ivan Boesky, Michael Milken and Martin Siegel

No Smoke Without Fire: Of Repuatation
#NSWF:Reputation 

1) From the inaugural exhaustive study of insider trading, FPM grants the S.E.C. “Dog Without Teeth” Degree. FPM elaborating on this Federal regulator's stymied enforcement would not be as pertinent as a former trial attorney at the S.E.C. Jim Kidney's parting shot at his retirement. Read about it in extracted form here (The original full speech has been removed from public domain by S.E.C. workers union!)

2) One of S.A.C. Capital’s earliest and biggest backers was Blackstone Group’s division, Blackstone Alternative Asset Management - BAAM. A NSWF:Reputation Degree awarded to BAAM: “Sham Sponsoring Schwarz”[1] 

BAAM bragg on their corporate website:
“Blackstone Alternative Asset Management (BAAM®) is the world’s largest discretionary allocator to hedge funds, with $69 billion in assets under management as of December 31, 2015". 

Blackstone Group, as a prominent sponsor and investor in the discredited, disreputable and now defunct in name S.A.C. Capital, is attributed a degree of guilt by association, as well as others (on the “FPM Reputation Blacklist”). Our induction and deduction suggests that certain executives, especially its chief executive officer J. Tomlinson Hill, also known as Tom Hill, probably did know about illegal activities at Mr Cohen's firm, and perhaps actively encouraged it for the spectacular returns; and that Blackstone even chose to turn a blind eye about early suspicions and reputation for insider trading by S.A.C. Capital’s owner manager. FPM adduces this thick-as-thieves conclusion from its template analysis, and is not intended as any slighting slander, and indeed to speculate on reputation:

“Mr Hill, did you know about Steven A. Cohen’s insider trading reputation, and what was your basis for investing with a reputed cheat; was his evasion of legal indictment a reputable kudos as source of exceptional trading returns?” FPM Princpal

FPM cite below a summary of "Circumstantial Evidence", once used in law to convict illicit traders. From these, FPM adduces between the hidden motivations with the public pretext:

1) Blackstone Pulled-Out Its Investment With S.A.C. At The Last Hour -
By fleeing a sinking ship at the last moment demonstrates conviction and faith in S.A.C. being able to survive the regulatory and legal enforcement onslaught. FPM belives the last minute exit was less about courage and support that their man was innocent, and more about face-saving exercise done to avoid guilt by association, and to limit wild-fire damage to its reputation. Remember that hedge fund investing firms that had wittingly or otherwise invested in Bernard Madoff's fraud lost a lot of credibility for their due diligence e.g. Union Bancaire Privee - UBP

2) Blackstone Sponsored Convicted DiamondBack as Investors Too -
The S.A.C. related insider-trading investigations also included, now failed, Diamondback Capital. The fund manager there was Todd Newman. As a former S.A.C. Capital workers, along with another convicted manager and co-founder of Level Global Investors, Anthony Chiasson, they both were handed a landmark verdict in the appeals court. Their criminal inider-trading convictions verdict from December  2012 was overturned and reimbursement of fines to them is underway. Blackstone connections to those with an edge in hedge funds is well known in inner circles but discussing it publically is much a taboo as anti-semitic construed remarks. FPM has made lists of associates of Blackstone principals, potentially acting-up as rogue traders - talk about "laying off risk"!

3) Blackstone and S.A.C. Have Relationship of Decade or More -
Aside of the opportunity for complicity and duplicity in a long marriage, FPM is also concerned about the quality of relations between the principals of these billionaires. We have looked into their occasional functional "meetups" like Council For Foreign Relations - CFR:...  

4) Founders of Blackstone and SAC Both Share A Jewish Heritage - 
The social or racial grouping provide both exclusivity and mutuality for operating as a cabal (a word with Hebrew origins), helping traditionally to keep the wealth within a family. The darker behavioural aspects of such ethnocentric groups are numerous and many for the report, needless to say that secrets, especially confidential business information may be passed without expectation of betrayal. The term "thick as thieves" comes to mind for this context of insider-trading rings.

5) Blackstone's Stephen Schwarzman Worked with Dennis Levine - 
Mr Schwarzman, a co-founder of Blackstone and Mr Levine as convicted insider-trader in the mid-1980s worked together as Mergers and Acquisitions bankers at Great Recession blow-up bank Lehman Brothers.

Insider trader of mid-1980s Dennis Levine (Source: "Den of Thieves" / FPM)

"Dennis was stealing my deals... It’s the most traumatizing thing that’s happened in my business career, to know that the person…in the next office, is a thief... When we started Blackstone I vowed that would never happen, and it hasn’t...” Stephen Schwarzman

From the practical experience of Milken, Levine, Siegel and Boesky era of insider-trading enforcement cira 1986, Mr Schwarzman understood the mechanism of insider trading, as well as the super easy certain investment returns, from the special relationship between deal-makers and traders, who under Glass-Stegall were prohibited from co-operation by Chinese Walls.

6) J. Tomilson Hill (Tom Hill),  Managed Dennis Levine -
Mr Hill, now head of Blackstone Alternative Asset Management - BAAM, had as then head of "Mergers and Acquisitions at Smith Barney in New York 1979 recruited, or correctly, hand picked and groomed Dennis Levine (notice the old school slivked back similarity of the two men?)

7) Dennis Levine Alleged That Tom Hill Was Insider Trading -
Mr Levine claimed J, Tomilson Hill had a secret trading account and was swapping inside information with an investment banker at Dillion, Read and trading on deals leaked by others. Levine had remonstrated  that:

"I could bring Hill down with what I know!" 

(Source: James B. Stewart, "Den of Thieves", 1991)

etc etc!
(N.B. Mr Hill and Mr Schwarzman, as far as FPM principals know, have never been formally accused of any misuse of confidential information; Mr Levine has been convicted and is unashamedly whistle-blowing)/

Among other smoke signals, the smoke from the reputation wild-fire which FPM tracks, was that FPM's check of Form 4 and 13F filings for listed Blackstone suggests an opportunity to buy into the correction before the impending market crash. Aside of the geopolitical bomb, we believe a market-led crash catalyst to be high-yield debt bust in oil and other fossil fuels, or perhaps a hedge fund blow-up - ala Long Term Capital Management - LTCM.

 Blackstone redeemed its investment just before SAC Capital was expected to be found guilty of insider trading. Any respectable organisation connected with a firm spawning a litany of insider trading advocates (see FPM's "SAC Capital's Litany of Litigation and Proceedings" from an post from xxxx), could reasonably be expected to disassociate themselves for lasting reputation sake. Especially, as they seemingly promote such ethical corporate governance values (cough cough!) – see screen-dump below explaining Blackstone’s “Guiding Principles”:

Bullshit! No, indeed they can manage this corporate perfidy?!

For disregarding the Blackstone Group's Guiding Principles, and even betraying them, as the potential fall-guy. FPM's ©NSWF:Reputation, with considered and adduced opinion, award J Tomilson Hill a Degree of "Schwarz Bullshit Artist". Indeed, James B. Stewart's epochal coverage of the insider-trading era of mid-1980s with Milken and Boesky, in "Den of Thieves" suggests that, Mr Hill sensed that Dennis Levine was in his terms, a "bullshit artist". Hence FPM's NSWF:Reputation Degree.  What goes around comes around eh!

In summary, FPM's three posters advertising FPM's ®NSWF:Reputation: 

S.E.C: “Dog Without Teeth” Degree

B.A.A.M: "Sham Sponsoring Schwarz"

J Tomilson Hill "Schwarz Bullshit Artist"

Of the person's mentioned or the protagonists of this ©NSWF:Reputation post, whom FPM are careful not to falsely accuse and slander, or in high-English “calumniate”. Bearing in mind that a) it is not slander if it is the truth and b) a reputation verdict is merely that, and everyone and everything can or does have one, even under constitutional freedom of speech laws, and c) in a context of financial services research being especially speculative in their nature. FPM's reputation enterprise is based on ‘mosaic’ research is indeed a veritable due diligence.
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Advert for ©NSWF:Reputation:

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[1] This NSWF:Reputation Degree is no way implies that Stephan A. Schwarzman, co-founder of Blackstone, is guilty by association; simply that “Schwarz”  has German etymology, from schwarz, an adjective for black)

 

Loud Report: The Organ of Calumny #1

FPM's NoSmokeWithoutFire: Of Reputation

© NSWF:Reputation

#NSWF:Reputation

Loud report issued from FPM's inception case study named after maxim that "there is no smoke without fire", in terms calumny and reputation for an entity, whether an individual or an institution. FPM's interest in the matter is to present a persistent reminder of historical wrong-doing and associated reputation of capital market operatives. The mainstream media is intent on distracting the public interest with ever-changing newsflow with public-relations dressed up reporting of corporate and white-collar criminality.
 
A multi-billion dollar hedge fund management operation in America has acquired an inaugural rating and listing in the financial community's calumny and reputation. Point72 Asset Management ("Point72") is now sidelined as an 'investment family office' dealing opaquely in the global social-eco-political order through its capital markets activities. Point72 was previously operating as SAC Capital. a renowned hedge fund operations since 1992. The exile for Point72 is suggested by its dishonourable exclusion as a money manager for public or external capital.
 
This banishment for Point72 from accepting and managing public money stems from a securities fraud crackdown started in 2007 as "Operation Perfect Hedge". SAC Capital, as it was known then, among others was implicated in illegal "systematic insider-trading". To be clear, insider-trading or insider-dealing is  basically a swapping of illicit professional secrets for mutual benefits. "Illict professional secrets" are formally known as "Material Non-public Information".

A cornerstone judgement involving former SAC Capital employees have set new legal precedents on December 9, 2014. This represents a sneaky time to announce a legal verdict against the interest of capital market integrity  and the public. A major 'hideaway'  news when most people are distracted by seasonal festivities. The United States of America's Department of Justice ("DoJ") and multi-agency regulation enforcers have turned an immense corner in making insider trading harder to prosecute, and thereby letting securities fraudsters off the hook. The precedent was set when an appeal court overturned the insider trading convictions for Newman and Chiasson). 

While the multi-billion dollars business owner, Steven A Cohen, escapes any accusation of wrongdoing or criminality, the business bearing the initials of his name, SAC Capital, settled out of court or simply reached an agreement with the US Justice system to handover more than US$ 2 billion. Some perfidious cynics in the asset management game have laughed-off the matter of multi-billion dollars legal settlement as simply "the cost of doing business". FPM counters that kind of cynicism, which creates an uneven playing field for stock market investors, and undermining of the integrity of the capital markets. We actively campaign under "NSWF-reputation" and dub the investment manager at the centre of SAC Capital as the  "The Artful Dodger" and "The Unconscionable Mr Cohen". Or loud report reputational identity:

Point72 Asset Management’s

Steven A Cohen reputation degree:

 “Disgracefully Dubious Coign”.

Note that "Coign" is a play on nomenclature of the protagonist, and with another meaning to the circumstances. The word means also a cornerstone and keystone. FPM's principals don't allege "palms being greased" between billionaires and professional regulatory enforcers for the sake of some political expediency; we simply present debate and actively campaign against perceived and actual "Corrupt Crony Capitalism at the C-Level".

SAC Capital (now renamed Point72 Asset Management) is awarded NSWF: Disgracefully Dubious Dogma degree.

Managers of the Alternative Universe

FPM is discerning trends and themes in the fund managers metamorphic landscape. Especially vigilant of established themes as well as emerging ones . Established trends are both at once an issue of concern and an exploitable transaction opportunity for investors and rain-makers alike. The commercial premise of this article arbitrages between Established Alternative Managers (EAMs) and Fledgling Emerging Managers (FEMs).

The process of institutionalization of alternative investment managers, namely, hedge funds, private equity et al is mired in paradoxes and oxymoron. How can a once boutique nimble investment management team producing above-beta absolute returns become an unwieldy behemoth and still produce alpha? In philosophical terms:

"You cannot step into the same river twice: you will not be the same person and it will not be the same water" Heraclitus 500 BC 

These large institutional asset managers whether Ken Griffin of Citadel or Clifford Asness of AQR started as small partnerships with an edge. To FPM that’s what the ‘edge’ in hedge funds should mean! Whether it was their innate talents (almost autistic character traits of principals, such as card-counting and astute gambling skills), and / or the ability to identify, exploit and strike at big opportunistic game, allowed these once hungry-and-angry origin whizz kids to become masters of the universe while compounding 20-30% annualized returns.

The increasing amount of evidence to support FPM’s thesis of the paradox of institutionalization is mounting. We are aware of some giants from the pantheon of hedge funds returning outside investors’ money and reverting to family office status. George Soros and Stanley Druckenmiller are two prominent examples from 2011 ahead of adherence to new SEC rules on registration in March 2012; there are many others. This operational reversion to origins is obviously de-institutionalization. Though managers may cite change as being for regulatory purposes, i.e. to evade the watchful burden of increasing scrutiny from financial watchdogs, it is clear that the financial landscape since the financial crisis of 2007-08 has changed for the venerable old timers mentioned and the like.

However, some heretofore secretive asset managers have not so much thrown in the institutionalization towel as elected to join the process (which we at FPM previously highlighted as the ‘Convergence Story’). To perspicacious FPM principals this evinced ‘asset gathering’ strategic impetus rather than ‘absolute return performance’ efforts. Our due diligence in the past has distinguished between ‘asset gatherers’ and ‘performance harvester’ or ‘alpha generation’ operations. The former tend to have numerically less and even relatively lower paid investment professionals. Asset gatherers are characterized by bigger marketing department budgets, perhaps wielding big hitters in its sales force and / or using specialist brokerage / distribution outlets. By implication the star marketer would also be a partner.

For instance, the once esoteric Farallon Capital Management is marketing itself with a nine-page Institutional Investor article under the financial news service EuroMoney publications. Using the back-story of its illustrious founder Thomas Meyer stepping down at fifty-five years of age, and successor Andrew Spokes being announced as the chief. This is a process of institutionalisation via branding. In corporate lifecycle terms it is a precursor to eventual floatation and other business exit strategies. Perhaps a chance for founders to pocket or release some self-vested equity capital in 10 years or so. In February 2007, Fortress Investment Group became the first U.S. hedge fund to go public. Other one-stop alternatives managers also saw the exit door like Blackstone (BX), Och Ziff et al. Some EAMs had the exit door firmly shut in their face by the ensuing financial crisis which they strangely could not foretell from their capital markets tea leaves, though they were managing multi-billion dollars of institutional money under the premise of economic and financial savvy - Doh!

Of the many ‘pulled’ IPO alternative managers, the potent example I cite is quantitative algorithm guru Clifford Asness’s AQR Capital. His fames needs little introduction to hedge fund aficionados, and needless to say the firm is a heavyweight and managing in excess of US$50 bn at end 2012. FPM foster pioneer strategies and managers as they tend to display their real depths of spirited enterprise. Mr Asness is not only a Ph.D professor who led the group that developed statistical models in 1989 which eventually formed the Global Alpha at Goldman Sacs, but is an advocate against exorbitant fees prevailing in AI. We have tracked that he has been spearheading the charge on high fees at least since 2010. Fee reduction is a necessary feature of the convergence story between mutual fund, hedge funds, exchange traded funds et al. Whatever Mr Asness’s motives, even if not altruistic, he seemingly is admitting that his own technology-based alpha is not especially genius! Perhaps partly the rationale for AQR’s unsuccessful planned cash-out of 10% stake as early as July 2007. We commend his fee integrity (yet as a made-billionaire backstabbing late hedge fund entrants as barriers – You’re ‘Avin Laugh!). In his own words about the state of the fees from a recent conference speech:

"Most hedge fund strategies are more about very competent implementation and fair fees and terms [institutionalization] than they are about 'genius’… Hedge funds generally offer a nice portfolio (gross of fees!) of passive beta, alpha, and a middle ground we call hedge fund beta or style premia; but unfortunately, managers like to charge fees as if it's all alpha” 

At FPM we view the ‘branded institutionalization’ of the alternative investments (AI) industry trend with diligent skepticism. Concerned that a) founding principals with the innovative investment technology wits are operationally and executively not at the helm henceforth and b) merely seeing institutionalization as a stepping-stone opportunity for retirement and/or cashing out from the global institutional operations they painstakingly established and developed. In private equity investor partnering parlance ‘divorce and separation’ is the end. FPM’s reservation on this trend cogitates on the idiom that institutions are now content to invest in the golden egg but not the goose that laid it! Hence why there is naturally a lot of noise about backing fledgling emerging managers in the burgeoning alternative space.

Other than institutionalization features relating to key man, fees, cashing-out, and regulation there are other salient aspects of transparency and reputation. These cannot be irrelevant or ignored concepts, especially now in neural/viral wired-up multi-media cyber globe. Whistle blowers, disgruntled staff, disillusioned investors, anti-capitalism activist, email trails etcetera all become source of unofficial non-public information.  The prevailing reputation of a manager with small asset under management (AuM) is all important to its preservation. Otherwise even any alleged fraud can change its fortunes quite quickly, for the better or worse. Therefore with partnership self-interest they are less inclined to risk their good repute with fraud or other corporate misdemeanor mischief or downright shenanigans. Managers consciously protect and preserve the firm in positive light to the privy circle of co-participants in the ‘edge’ investment game. Degree of transparency to regulators, or institutional publicity in media is often minimal in niche partnership family-office type investment operations. Indeed investment regulation limited whom unregistered investment vehicles could market itself to (‘qualified investors’ only), and to whom the manager had obligatory reporting duties.

Since this note's premise explores why size matters in investments. Investment flexibility and alignment of interests are other considerations when deciding to park with large managers. For instance, on investment position sizing, the principals of the partnership may decide that a high conviction risk-on trade is permissible. Institutional policy tends to be compliant with oversight regulatory bodies. Bodies which monitor and dictate risk parameters to larger registered money managers. An essential feature of alternative investment mandates is the scope of flexibility in investment asset and strategies, within given private placement memorandum. This flexibility is further watered-down in larger institutions as key man / principals may delegate investment risk decisions to vested investment committees.

“Blackstone Alternative Asset Management (BAAM) is the world’s largest discretionary allocator to hedge funds, with $46 billion in assets under management as of December 31, 2012.” Source: blackstone.com

For example, BAAM started out as family size operations:  In 1990, Blackstone created fund of hedge funds business to manage the internal assets and that of its senior managers of the then mainly private equity core business.

FPM’s due diligence identifies institutional managers by the degree of the managers’ alignment with its clients / investors, essentially by a ratio measuring principals’ and internal capital to that of the fund or firm AuM: 

"Most importantly, our interests are always closely aligned with our clients' with over $1.3 billion of the firm's and employees’ assets invested alongside those of our clients." Source: blackstone.com

So US$1.3 bn of “firm’s and employees” assets of a total US$46 bn in AuM is the extent of alignment of BAAM fund of hedge funds business to its clients. This is much much lower ratio than at the turn of millennium, when alternative investments and industry bellwether Blackstone Group came into institutional prominence, at the height of the DotCom bubble. BAAM acknowledges its own asset  gathering impetus on the Blackstone website “Over Ten Years of Asset Growth”. To FPM’s long memory BAAM’s current ratio of mutual investment interest is poor evidence of economic alignment between a firm and its clients. Further, asset growth is not the same as asset performance.

Often profitable niche business is kept close to one’s chest and a privy few as a closely guarded money-making secret. How many professional investors understood or had ‘the edge’ in exploitatively spotting the US housing bubble through the sub-prime market in 2007-09, and then were also able to make an ‘absolute’ killing? Certainly only handful of investors, from reading the Gregory Zuckerman book “The Greatest Trade Ever” concentrating on Paulson and Co.

Damaging reputation to a manager with large asset-base can lead to assets walking out of the door, which can be successfully public-relations-managed as an operable hemorrhage, given time. This mega asset base providing a substantial buffer / margin against sudden multi-million liquidity shocks is the implicit explanation as to “why big hedge fund gets bigger”.  In the same scenario smaller AuM hedge fund firms founder. Large institutional investors tending to pile into the perceived relative safe-haven of hedge funds and other alternatives are sacrificing absolute performance for cash preservation mandate. Understandable that strong absolute return performance is incompatible with cash preservation, but here’s the bewilderment. Even accomplished pension or proprietary capital administrators allocating to hedge funds are overlooking ‘alpha generation’ while allocating in an ‘all-about-alpha asset class!’ Further, these savings administrators believe they have to pay “2/20” fees for core low volatility portfolio cash preservation mandate. Why don’t they invest directly in cash bonds! It’s the same mockery and folly as an airline marketing its premium first class seats as plane-crash-risk-proof. All the seats are the same in the aero plane and subject to the systematic risk of it going down (unless the first class seats are re-enforced with steel bars like that cockpit of fast-car drivers or fitted with parachute ejection seats).

Performance of hedge funds as an asset class, as indicated by a benchmark index average, fared only marginally and negligibly better than equity market index, such as the S&P 500, over the recent systematic financial crisis. Then as stock markets recovered from an approximately 50% drawdown, hedge funds underperformed (and some threw in the towel unable to reach high water mark and thus earn performance fees). In the long-run the convergence story depicts falling alpha and alignment of hedge fund performance with market, asset, or strategy index. Achieving index returns by hedge fund portfolio managers (like conservative FoFs) in absolute return investments is a misnomer or sheer debauchery of AI. Similar to to turning a thoroughbred racing horse or stallion  into a rocking-horse! The tilt in favour of hedge funds comes from alternative managers being able to acknowledge gross of fees…

[ For a complete business proposal based on this note please email FPM with link]