The US’s recent economic history is littered with cautionary tales. And the hedge fund business is certainly no exception. Take for instance the failure and flameout of former CNBC anchor Ronald Insana, as told by NYT’s Andrew Ross Sorkin. The bottom line: Making billions (or even millions) running a hedge fund is harder than it looks.
Insana’s departure from CNBC:
In March 2006, Mr. Insana left the network to try his hand at becoming one of those titans, setting up a fund to help investors get into hedge funds, a so-called fund of funds. Paul Kedrosky, the writer and investor, said at the time that Mr. Insana’s announcement “reminded him a little of Lou Dobbs going to Space.com at the peak of the dot-com bubble.” Mr. Dobbs’s adventure, you may recall, didn’t turn out well; he’s back on TV.
Hedge fund investors don’t only prefer positive returns, they demand them. Beating the market is not good enough:
Over the course of more than a year, Mr. Insana raised about $116 million. It was a respectable number, to be sure, but it wasn’t $3 billion. And here is where Mr. Insana ran into trouble.
As an investor, Mr. Insana didn’t exactly have the wind at his back. During the 14 months his fund of funds was up and running, the Standard & Poor’s 500-stock index fell more than 15 per cent. While some hedge funds managed to eke out gains, many did not. Ultimately, Mr. Insana’s fund lost 5 per cent.
Oh well, so there were no profits to share in. At least he got to keep a handsome management fee bounty, right? Nope:
That left his management fee, which amounted to $1.74 million. (That’s 1.5 per cent of $116 million.)…After paying [his partner] Deutsche Bank, Insana Capital Partners was left with only about $870,000.
That would have been enough if it was just Mr. Insana, a secretary and a dog. But Mr. Insana was hoping to attract more than $1 billion from investors. And most big institutions won’t even consider investing in a fund that doesn’t have a proper infrastructure: a compliance officer, an accountant, analysts and so on. Mr. Insana had seven employees, and was paying for office space in the former CNBC studios in Fort Lee, N.J., and Bloomberg terminals — at more than $1,500 a pop a month — while travelling the globe in search of investors. Under the circumstances, $870,000 just wasn’t going to last very long.
Insana had no choice but to close up shop:
Two weeks ago, Mr. Insana announced that he was throwing in the towel….
Mr. Insana probably should have seen it coming. In 2002, he wrote a book called, “Trendwatching: Don’t be Fooled by the Next Investment Fad, Mania, or Bubble.” Oops.
Insana’s failure may not be as epic as others, but, just like the dot-com bubble showed, there’s no easy way to print money…
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