LIZ: COULD HEDGE FUNDS BE THE
NEW CANARY UNTHE ECONOMY
COAL MINE?
WILL THE PERFORMANCE OF TIGER
GLOBAL GUYS THIS IS ONE OF THE
BIGGEST HEDGE FUNDS IN THE
ENTIRE INDUSTRY DOWN 52%
JUST THIS YEAR, CLOCKING
$17 BILLION IN LOSSES.
MUCH OF IT ATTRIBUTED TO HUGE
INVESTMENTS IN SILICON VALLEY
UNICORNS WHICH RECENTLY FLOUNDER
ED ALONG WITH THE TECH
SECTOR AND THEN D 1 CAPITAL
PARTNERS WHICH LAST YEAR POSTED
A GIGANTIC PORTFOLIO GAIN OF 70%
NOW SCRAMBLING AFTER DOWN 23%
YEAR-TO-DATE AFTER HAVING BORROW
ED 2 BILLION TO TAKE
STAKES IN PRIVATE COMPANIES
WHOSE VALUATIONS, YOU GUESSED IT
, HAVE NOW PLUNGED AND LAST
MONTH, MELVIN CAPITAL PULLED THE
PLUG ON HIS FUND AFTER WRONG-
FOOTED SHORT BETS ON
GAMESTOP AMONG OTHER NAMES AS
MANY HEDGE FUND TRADERS FIND
THEMSELVES ON THE WRONG END OF
THE MARKETS WHICH ARE IN OR
HOVERING AROUND BEAR TERRITORY
IS THE WORST YET TO COME?
LET’S BRING IN HEDGE FUND
VETERAN RAJ RAJARATNAM.
HE FOUNDED AND MANAGED THE GALI
AN GROUP HEDGE FUND
UNTIL AN INSIDER TRADER FORCED
ITS CLOSURE IN 2009 AND HE RUNS
HIS FAMILY OFFICE GLOBAL.
HOW MUCH WORSE IS THIS GOING TO
GET?
THESE ARE A COUPLE NAMES THAT
REPORTED THEIR VERY BAD
PERFORMANCE.
>> I THINK IT’S GOING TO GET A
LOT WORSE, LIZ, BECAUSE WHAT I’M
ASTOUNDED BY IS THE LACK OF RISK
DISCIPLINE IN THESE HEDGE FUNDS.
WE TALK ABOUT ASSET BUBBLES AND
MEME STOCKS.
WE TALK ABOUT BUBBLES IN SPACS.
WE TALK ABOUT BUBBLES IN
CRYPTOCURRENCY, BUT THESE ARE
SUPPOSED TO BE SOME OF THE MOST
SOPHISTICATED INVESTORS, AND THE
REASON PEOPLE GIVE 2%
MANAGEMENT FEE AND 20% INCENTIVE
FEE IS TO MANAGE THEIR RISK IN
DOWN MARKETS.
WHAT WE’VE SEEN IS THAT THE
LARGE HEDGE FUNDS, LONG-
SHORT EQUITY HEDGE FUNDS
HAVE GOT INTO SPAC INVESTING AND
GOT INTO PRIVATE EQUITY INVEST
ING, GOT INTO VENTURE
CAPITAL INVESTING WHICH IS NOT
THEIR TRADITIONAL EXPERTISE AND
THEY’RE BORROWING MONEY SO WHEN
THE MARKET TURNS, THEY’RE NOT
ABLE TO BE FLEXIBLE AND MOVE
QUICKLY.
LIZ: WHAT AMAZES ME IS PEOPLE,
AS YOU SAY, ARE PAYING THESE
GUYS TO BE MUCH SMARTER THAN THE
REST OF US IN THE ROOM, AND
LOOK WHAT IS HAPPENING HERE WHEN
THE MARKETS FLIP A SWITCH AND
THE TABLES DO TURN, THAT’S WHEN
AS BUFFETT LIKES TO SAY YOU SEE
WHOSE BEEN SWIMMING NAKED AS
THE TIDE GOES OUT.
I KNOW YOU CAN’T NAME NAMES BUT
WHAT TYPES OF BETS HAVE GONE SO
WRONG-WAY THAT WE WILL START TO
SEE SOME HEDGE FUNDS THAT HAVE
MADE THOSE BETS MAYBE GO UNDER?
>> WELL, IF YOU’RE DOWN 50%,
YOU NEED TO MAKE ANOTHER 100% ON
YOUR CAPITAL TO GET TO BREAKEVEN
, SO IF YOU STARTED AT
100, GO TO 50 NOW YOU HAVE TO
DOUBLE THE 50 TO GET TO 100 SO
THERE’S GOING TO BE A LOT OF
HEDGE FUNDS THAT ARE UNDER WHAT
THEY CALL THE HIGH WATERMARK AND
THEY AREN’T GOING TO WORK FOR
FREE SO SOME OF THEM WILL
CLOSE DOWN AND POSSIBLY RESTART
AGAIN.
LIZ: THEIR INVESTORS COME KNOCK
ING AT THE DOOR AS WELL.
IT’S JUST STARTS FALLING LIKE
DOMINOES SAYING WE WANT --
>> TO PULL THE MONEY OUT.
SO I THINK A WHOLE BUNCH OF
HEDGE FUNDS THAT WILL CLOSE SHOP
EITHER BECAUSE INVESTORS ARE
TAKING MONEY OUT OR BECAUSE
THEY DON’T WANT TO STAY THE
COURSE.
SO THE MOST IMPORTANT THING TO
BE A HEDGE FUND MANAGER IS TO
MANAGE RISK AND THAT’S WHY
INVESTORS GIVE YOU THE HIGH
INCENTIVE FEE.
LIZ: HENCE THE TERM EDGE.
>> CORRECTLY.
LIZ: CLOSE TO HEDGE.
LET ME ASK NOW, THEY ARE ALSO
GETTING ANOTHER STUMBLING BLOCK
THROWN AT THEIR FEET AND THAT IS
THE POTENTIAL RULE CHANGE TO
TRADING THAT GARY GENSLER, THE
SECURITIES AND EXCHANGE
COMMISSION CHAIR WANTS TO MAKE.
HEDGE FUNDS MAKE MASSIVE BLOCK
TRADES.
HOW DO YOU FORESEE HIS CHANGES
POTENTIALLY INVOLVING THINGS
LIKENING PAYMENT FOR ORDER FLOW
PRACTICES, EFFECTING HEDGE FUNDS
AND QUITE FRANKLY, COULD ANY
KIND OF CONTAGION SPILL OVER TO
THE RETAIL INVESTOR?
>> SO LIZ, PAYMENT FOR ORDER
FLOW IS MAINLY AIMED AT THE
RETAIL INVESTOR.
TODAY THE RETAIL INVESTOR
ACCOUNTS FOR ABOUT 20% OF THE
TRADING, SO FIRMS LIKE SARAH
SANDERS CHARLES SCHWAB, E-TRADE,
ROBINHOOD, THEY SHOP THESE ORDER
S TO A FIRM LIKE CITADEL OR
VIRTU, AND THEY GET PAID FOR
THAT ORDER FLOW.
IN FACT, THESE BROKERAGE FIRMS
LAST YEAR MADE $3.8 BILLION
PAYING THE BROKERAGE FIRMS FOR
ORDER FLOW.
LIZ: RIGHT.
NOW, WHAT YOU DO IF YOU’RE E-
TRADE OR CHARLES
SCHWAB GIVE IT TO YOUR FAVORITE
EXECUTION BROKER AND WHILE THE
PUBLIC THINKS THEY ARE
GETTING NO COMMISSION, THEY
AREN’T GETTING THE BEST
EXECUTION PRICE, SO THE
COMMISSION IS BUILT INTO THE
SYSTEM.
SO I THINK THAT IT’S A GREAT
IDEA THAT GENSLER IS TRYING TO
MAKE IT MUCH MORE COMPETITIVE
AND PUT IT INTO AN AUCTION
SYSTEM, BUT KNOWING WASHINGTON
AND KNOWING THE LOBBY OF THE
BROKERAGE FIRMS I’M NOT
OPTIMISTIC THAT ANYTHING WILL
GET DONE IN THE NEAR FUTURE.
LIZ: YOU ARE RUNNING MONEY FOR
YOUR FAMILY OFFICE.
THE MARKETS HAVE BEEN VERY HARD
TO ANTICIPATE.
WHAT DO YOU SEE AS AN
OPPORTUNITY RIGHT NOW,
RAJ?
>> YEAH, SO WE INVEST IN THE
SOFTWARE TECHNOLOGIES, AND
WE’VE BEEN VERY CAUTIOUS ON THE
MARKET.
IT’S A VERY VERY CHALLENGING
YEAR THIS YEAR.
WHAT WE ARE SEEING NOW IS THE
VALUATIONS HAVE COMPRESSED,
AND WHAT WE ARE DOING IS LOOKING
AT COMPANIES OR SECTORS THAT
ARE SOMEWHAT NEEDING ASSISTANCE
SO THERE ARE THREE SECTORS WE’VE
IDENTIFIED.
ONE IS CYBERSECURITY.
EVERYDAY, PEOPLE ARE PLANNING TO
HACK COMPANIES IN THE UNITED
STATES.
WE LOOK AT CLOUD COMPUTING,
WHICH IS IMPORTANT AND ELECTRIC
VEHICLES.
@ TREND TOWARDS CLEAN ENERGY AND
ELECTRIC VEHICLES IS A SECULAR
TREND AND WITHIN THAT WE HAVE
COMPANIES THAT WE HAVE INVESTED
IN.
LIZ: GOOD TO SEE YOU, RAJ.
PLEASE COME BACK BECAUSE I KNOW
THE HEDGE FUND STORY IS FAR FROM
OVER, A LOT OF THEM MAY START TO
FALL AND STUMBLE AND THEN OUT