by Dan Burrows | November 1, 2013 2:17 pm
Hedge fund managers are Wall Street’s modern-day masters of the universe. And yet these same managers charge exorbitant fees — say, 2% of assets under management and 20% of profits — all while failing to keep up with a plain vanilla S&P 500 exchange-traded fund.
That’s right: Hedge funds actually have a lousy track record, underperforming the broader market over just about any time frame you care to look at.
Still, the stories of extravagant hedge fund riches are hard to ignore. Like John Paulson of Paulson & Co. booking $5 billion in profit in a single year by betting against subprime mortgages. Some managers really do earn their keep and are worth every penny of those crazy fees. Of course, retail investors can’t just log into their online brokerage accounts to place money with Paulson’s hedge fund, or any other hedge fund for that matter.
But some star hedge fund managers also have publicly traded holding companies (with the hedge fund being the majority shareholder.) No, it’s not the same thing as buying into the hedge fund, but these stocks do afford retail investors a way to benefit from the investing skill of some of Wall Street’s biggest fund managers.
Here are three stocks that offer a backdoor into the high-stakes world of hedge fund wheeling and dealing:
Carl Icahn is never far from the spotlight, but it seems like he’s been everywhere and involved in everything in 2013.
Among Icahn’s more notable ways of making the news this year are hassling Apple (AAPL) to buy back more stock, bidding to take Dell (DELL) private, going long on Herbalife (HLF) in order to punish a rival who went short, and selling a huge stake in Netflix (NFLX) at an obscene profit.
It’s never boring when Carl Icahn is around, and if you want in on the fun, consider buying shares in Icahn Enterprises (IEP). IEP is up 128% for the year-to-date, while the dividend yields 5%.
Phil Falcone is another hedge fund manager who made it big betting against subprime mortgages before the housing bust, but things haven’t gone so well for the billionaire this year.
Charged with securities fraud, Falcone settled for $11.5 million and a five-year ban from the securities industry. But that hasn’t hobbled shares of Harbinger Group (HRG), the holding company majority owned by Falcone’s Harbinger Capital hedge fund.
Falcone remains chairman and CEO of HRG, and business is good. With stakes in everything from Spectrum Brands (SPB) to Fidelity and Guaranty Life, HRG is up 42% so far in 2013, beating the broader market by 19 percentage points.
Okay, Warren Buffett isn’t a hedge fund manager, but Berkshire Hathaway (BRK.B) sure looks a lot like a hedge fund.
True, where hedge fund managers invest capital collected from investors, Buffett deploys cash generated by Berkshire’s insurance company holdings. But after that, similarities abound. After all, Berkshire owns outright or has sizable positions in other companies (as do hedge funds), and it even uses derivatives to help hedge risk.
Of course the most important similarity is that the company’s success has hinged on the investing genius of a single man — just like any killer hedge fund (but without all the ego). Berkshire’s up 28% for the year-to-date, beating the S&P 500 by 5 percentage points.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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