jim cramer hedge fund profits asset management

How to Make a Million Bucks an Hour
redemptions stocks manipulation

Hedge Funds Get Away With Investors' Funds

Don’t say anything remotely truthful is their advice. Mine's different: don't let wealth get concentrated unduly in the first place. We excerpt this 2013 article from AlterNet, Apr 5.

by Les Leopold

Most hedge-fund managers skim 20 percent of the profits, while administrative costs are usually 2 percent or more of the assets under management.

Yet you get your 20 percent only when your returns take the fund over what’s called the “high-water mark.” If you lose money, then you won’t collect another 20 percent until you make up those losses and bring your fund back past the last high-water mark.

Then there are those dreaded redemptions. That’s when the fund’s investors decide to take their money and run. Each year, hedge funds offer investors a window of time—perhaps a few days, two or three times a year—when they can take out some or all of their funds. If your fund is losing money, your investors may run for the hills.

Cramer: I knew that if I came to work every day with just my wits, made my calls, looked at my stocks, looked at the tape, the procession of stocks crossing the ticker, checked in with my sources and my analysts, I could make $400,000 in 12 hours.

Then when LTCM lost its trillions, Cramer’s hedge fund lost 10, 20, 30 percent of its value in a matter of days. In the middle of it all, the fund entered an unexpected redemption period. According to Cramer, it happened because his good friend Eliot Spitzer, an investor, needed to take his money out so that he could run for New York State Attorney General. Cramer had made a pledge that if he let one person pull money from the fund, he’d let everyone do it. So Cramer opened up the fund just at the peak of the LTCM crash. Many of his dearest friends took their money and ran.

Because of the fund’s loss of value and lack of cash, Cramer had to borrow tens of millions to pay off the investors who were leaving. Eventually, he even had to break margin rules to borrow more than he was allowed to, hoping against hope that his broker bank, Goldman Sachs, wouldn’t catch him and liquidate his collateral. It got so bad that his beloved wife, Trading Goddess, found a babysitter for the kids so she could focus on scoring a few trades that might keep the fund from folding.

Meanwhile, word was spreading among reporters and talk show hosts. Jim Cramer was in trouble. Cramer had to go on TV and admit that times were tough—though the hedge fund, he insisted, was not about to go belly-up.

That didn’t keep other hedge-fund sharks from circling in for the kill, betting against Cramer’s positions to force him to liquidate. (Remember, this is a key part of the million-an-hour strategy: if you think something could die, bet it will die, and then kill it.) Cramer desperately defended his key positions by buying more and bluffing. It was a battle of wills and money. Somehow Cramer managed to keep the sharks at bay, at least for a few days.

Then things got really grim. Cramer’s good friend Larry took his money out of the fund and called Cramer a loser. Cramer hit bottom.

Then, by chance, at the eleventh hour, the Cramers were saved: Fed chair Alan Greenspan slashed interest rates, and the markets bounced back.

For the last quarter of the year, the Cramer fund made up all of its losses and then some. The Cramers again went back to presiding over a booming hedge fund.

He doesn’t pretend that the hedge-fund industry is socially useful or that hedge-fund managers such as him are really worth all that they earn.

When Jim Cramer’s interview with Aaron Task of TheStreet .com spread to YouTube in March 2007, it kicked up such a storm that the website pulled the piece and told everyone else to pull it as well.

Hedge funds are supposedly betting on the movement of markets, not manipulating those movements to ensure a winning hand. Yet Cramer was confessing that when he was betting against stocks— going short—he temporarily drove the market down, and when he was long, he drove the market up. After this brief manipulation, Cramer collected on his bet, scoring a nice a profit, and got out.

Cramer explained that his eye was always glued to the key stocks, including Apple and Research in Motion (RIM), the maker of the BlackBerry, because when they move, they take the entire market with them (or so they did in 2007).

Cramer: You really gotta control the market. You can’t let it lift. When you get a Research in Motion, it’s really important to use a lot of your firepower to knock that down ’cause it’s the fulcrum of the market today.

Cramer: You can’t create yourself an impression that a stock’s down. But you do it anyway ’cause the SEC doesn’t understand it. That’s the only sense that I would say this is illegal. This is just actually blatantly illegal. But when you have six days and your company may be in doubt because you’re down, it’s really important to foment an impression that Research in Motion isn’t any good, because Research in Motion is the key.

And what exactly did he mean by “illegal fomenting”? Apparently, he meant manipulating the press, spreading rumors. Cramer was admitting that he fed bogus information on Research in Motion to financial reporters such as CNBC’s Bob Pisani. Cramer: Then you would call the [Wall Street] Journal and you get the bozo reporter on Research in Motion, and you would feed that Palm’s got a killer it’s gonna give away. [PalmPilot was then a key BlackBerry rival.]

Cramer: Apple’s very important to spread the rumor that both Verizon and ATT have decided they don’t like the iPhone. It’s a very easy one to do. You want to spread the rumor that the iPhone is not gonna be ready for Macworld [the big trade conference]. This is very easy because the people who write about Apple want that story, and you can claim that it’s credible because you spoke to someone at Apple.

Cramer: These are all what’s really going on under that market that you don’t see. Flat-out lying is the only way to win. What’s important when you’re in that hedge fund mode is to not do a thing remotely truthful.

Cramer: Who cares about fundamentals! . . . The great thing about the market is it has nothing to do with the actual stocks. Maybe two weeks from now the buyers will come to their senses and realize that everything they heard was a lie. . . .

It’s just fiction and fiction and fiction. I think it’s important for people to recognize that the way that the market really works is to have that nexus hit the brokerage houses with a series of orders that can push it down, and we get to the press and get it on CNBC. That’s very important. Then ya have kind of a vicious cycle down. It’s a pretty good game and it can be played—it can pay for a percent or two.

Which is breaking the law. According to the Securities and Exchange Commission, rumormongering is defined as “the intentional spread of false information intended to manipulate securities prices.” The prosecution would have to show that “first, the rumor was inaccurate; second, the market was impacted by the rumor; and third, the defendant knew or should have known that the rumor was inaccurate”.

According to Jim Cramer, if you don’t engage in illegal rumor-mongering to manipulate the market, then you shouldn’t be running a hedge fund .

Cramer described another illegal maneuver—price fixing: Cramer: The problem with the cell phone market, frankly, is that these guys are all killing each other. Someone has to take a dive. Motorola and Nokia have to get in the room and just fix price. They’ve been reluctant to do that because of the various justice departments. Price fixing is illegal but "that hasn’t stopped a lot of other companies.”

To read more

JJS: When those hedge fund managers win by cheating, that means some investor at the other end of the trade loses, and loses illegally, just as if s/he'd been robbed in the street or burglarized, yet those rich thieves almost never go to jail, which is not fair.

But knowing this about them, why do we give them our money? We don’t do it directly, because we’re not rich enough to be able to open an account with them, but we do it indirectly. How? We tolerate corporate welfare. We fail to recover full-market value for things like patents and land titles. We tax buildings and sales and wages, which makes people desperate enough to accept the terms of the rich.

And most fundamentally we don’t share the common wealth, society’s surplus, all its spending for land, resources, airwaves, and nature in general. If we'd share common wealth fairly, it could not be concentrated into a few lucky pockets by those lacking scruples.


Editor Jeffery J. Smith runs the Forum on Geonomics and helped prepare a course for the UN on geonomics. To take the “Land Rights” course, click here .

Also see:

Bail Out The Banksters?

One of the Canada's Biggest Banks Gets It

Bailed Banks Donate to Campaigns With Gov't Money

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