Blog Ipsa Loquitur

Published on under This Doesn’t Add Up

Premise: hedge funds are usually a waste of money. Hedge funds are, almost without exception, unable to pick winning stocks for more than a year or two in a row. Worse, the hedge fund managers charge you to let them play with your money. If they lose your money, you pay their salary. If they win you money, you pay them a bonus.

From where I’m sitting, the smarter play is to just invest in all the stocks, because over the long term, the stock market goes up even if individual stocks go down. This is the sort of strategy that investment firms like Vanguard use. Here’s Ben Carlson noting that major universities’ endowment funds have chosen… poorly:

Vanguard beat the average [university’s fund] over the past 5 years for every endowment size and came up just shy of the ‘$1 billion and over group’ over 10 years while besting the rest of the group averages. Think about these results for a minute — these endowment funds hire the biggest investment consultants, have huge investment committees, connections with alumni at some of the best money managers in the world and fully-staffed investment offices in many cases.

All that work, all of those due diligence trips, all of those extra fees paid to money managers and the majority of these funds still couldn’t beat a low-cost Vanguard index portfolio that was simply rebalanced once a year.

It could be worse, though. Take New York City’s pension fund: that’s the money used to pay 715,000 current and future retirees. The city can make each employee’s savings go farther if, instead of letting that money sit around, it invests the money while waiting for employees to retire. By and large, the Wall Street firms paid to invest that money on NYC’s behalf do an okay job.

Until NYC gets the bill:

Over the last 10 years, the return on those “public asset classes” has surpassed expectations by more than $2 billion, according to the comptroller’s analysis. But nearly all of that extra gain — about 97 percent — has been eaten up by management fees, leaving just $40 million for the retirees, it found.

Pretty amazing coincidence that the cost of making $2.5 billion was almost exactly $2.5 billion, eh?

Super PACs, man

But finance isn’t the only industry in which you can pay lots of money to get almost nothing in return. David Frum, former speechwriter for President George W. Bush, wrote a great article in February on what he sees as a slight issue with Republican political spending:

Increasingly, super PACs look like the political world’s equivalent of hedge funds: institutions that charge vastly above-market fees to deliver sub-market returns. […] In an interview on election night 2012, Chris Wallace challenged Karl Rove: “[American] Crossroads, which you helped found, spent—what?—$325 million, and we’ve ended up with the same president, the same Democratic majority in the Senate, and the same Republican majority in the House. Was it worth it?”

Now, most of that money was spent by Karl Rove’s 501c4, which is forbidden under federal law from supporting or opposing a specific candidate. But virtually all of the $110 million spent by Karl Rove’s Super PAC supported losing candidates and/or opposed winning candidates. It’s left as an exercise for the reader to determine whether the c4 backed the same horses.

Frum notes that it’s not just Karl Rove and it’s not just the 2012 election:

Late Sunday night, CNN reported a remarkable allegation. An anonymous Jeb Bush bundler estimated that Mike Murphy, the director of Bush’s Right to Rise, had billed the super PAC $14 million for his services—more than 10 percent of all the super PAC’s revenues. Murphy fiercely disputed the claim, and the next day CNN updated the original post with additional information.

Sidebar: “Jeb” is actually J.E.B.: John Ellis Bush. When you call him Jeb Bush, it’s John Ellis Bush Bush. It’s like saying PIN Number or ATM Machine. That always bothered me.

Realistically, though? Saving $14 million for more ads probably wouldn’t have helped Jeb. There’s no limit to the amount of money a Super PAC can take from donors, so if Right to Rise was doing well, they probably could just have raised more money from the same crop of investors.

Which brings me to maybe my favorite bit of Frum’s column:

A long time ago, I wrote a history of the 1970s. One of its sub-themes was the emergence of the post-Watergate campaign-finance system. I was surprised to learn that some of the strongest proponents of limits on campaign donations were the donors themselves. Many had felt extorted by the 1972 Richard Nixon re-election campaign.

That campaign had targeted executives in federally regulated industries, notably aviation, with a strong message of “Nice little price-regulated airline you have here, it would be a shame if the president’s appointees disapproved your requests for fare increases to keep pace with inflation.”

You know, it’s this sort of Machiavellian maneuvering that really threatens to tarnish Nixon’s legacy.

It certainly sounds like the 1970s were a nightmare for our most vulnerable citizens: the extremely wealthy. Thank goodness we as a society have done away with unlimited political spending, and the rich no longer get fleeced by unscrupulous political operatives.