Whitney Tilson: No One Questioned This Hedge Fund’s Madoff-Like Returns

Image source: Pixabay

Image source: Pixabay

Image source: Pixabay

Image source: Pixabay

Whitney Tilson’s email to investors discussing Munger meeting yesterday; A Man for All Markets; The Watchdog Protecting Consumers May Be Too Effective; Wall Street Pioneer Hopes More Females Will Emerge; No One Questioned This Hedge Fund’s Madoff-Like Returns

Whitney Tilson – Munger meeting

1) A few hundred die-hard value/Berkshire/Munger junkies (he calls us “cult members”) joined me yesterday to hear Charlie Munger take questions for two hours at the Daily Journal annual meeting in LA.

• Attached are Adam Blum’s excellent notes (8½ pages), followed by two handouts Munger distributed: a) a parody he published in 2011 called: Wantmore, Tweakmore, Totalscum, and the Tragedy of Boneheadia; and b) an essay he wrote in 1984 calling for increased taxes to discourage short-term trading in the market.
• I’ve posted my audio of the meeting in two places: www.tilsonfunds.com/Munger-Daily Journal mtg-2-15-17.MP3 and https://www.dropbox.com/s/ilqii7s7v9jj3kv/Munger-Daily%20Journal%20mtg-2-15-17.MP3?dl=0 (CNBC also recorded it and has started posting clips here)
• At the end of this email are a few pictures I took.

Whitney Tilson – A Man for All Markets

2) Munger’s one book recommendation happens to be one I’m reading (actually listening to) right now (I’m 80% finished): A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market. It’s excellent! Here’s the blurb from Amazon:

The incredible true story of the card-counting mathematics professor who taught the world how to beat the dealer and, as the first of the great quantitative investors, ushered in a revolution on Wall Street.

A child of the Great Depression, legendary mathematician Edward O. Thorp invented card counting, proving the seemingly impossible: that you could beat the dealer at the blackjack table. As a result he launched a gambling renaissance. His remarkable success—and mathematically unassailable method—caused such an uproar that casinos altered the rules of the game to thwart him and the legions he inspired. They barred him from their premises, even put his life in jeopardy. Nonetheless, gambling was forever changed.

Thereafter, Thorp shifted his sights to “the biggest casino in the world”: Wall Street. Devising and then deploying mathematical formulas to beat the market, Thorp ushered in the era of quantitative finance we live in today. Along the way, the so-called godfather of the quants played bridge with Warren Buffett, crossed swords with a young Rudy Giuliani, detected the Bernie Madoff scheme, and, to beat the game of roulette, invented, with Claude Shannon, the world’s first wearable computer.

Here, for the first time, Thorp tells the story of what he did, how he did it, his passions and motivations, and the curiosity that has always driven him to disregard conventional wisdom and devise game-changing solutions to seemingly insoluble problems. An intellectual thrill ride, replete with practical wisdom that can guide us all in uncertain financial waters, A Man for All Markets is an instant classic—a book that challenges its readers to think logically about a seemingly irrational world.

Whitney Tilson – The Watchdog Protecting Consumers May Be Too Effective

3) What Trump does with the Consumer Financial Protection Bureau will be a HUGE litmus test. Is he going to look out for the citizens who elected him, for whom the CFPB has been an ENORMOUS ally against the endless predatory behavior by virtually every area of the financial sector (mortgages, student and auto loans, credit, debit and prepaid cards, payday lenders, etc., etc.)? Or will he cave to the desires of so many of his advisors who come from the financial sector? Sadly, I’d give heavy odds on the latter… Here’s an excellent piece by Gretchen Morgenson:

Why would the president want to rein in the only federal agency dedicated to the consumer finance beat? Perhaps it has been a little too effective in pursuing wrongdoing by banks, consumer credit reporting companies, credit card issuers and student loan collectors.

While these activities have earned kudos from Main Street, the bureau has also made powerful enemies among financial institutions whose executives have the ear of Mr. Trump and other Republicans. According to a leaked memo that emerged late this week, Jeb Hensarling, the Texas Republican who heads the House Financial Services Committee, will move forward with legislation to weaken the bureau and its enforcement powers.

Republican lawmakers like Mr. Hensarling have been trying to hobble the bureau ever since its creation in 2012 under Dodd-Frank. But none of these efforts have gotten far.

With a new administration in town, the momentum against the bureau is building…

Whitney Tilson – Wall Street Pioneer Hopes More Females Will Emerge

4) I missed this when it came out in June…

If the paucity of women on Wall Street in general is noteworthy, the paltry number of female fund managers is even more jarring.

Susan Hirsch, manager of the $3.6 billion TIAA-CREF Large-Cap Growth fund, is one of the pioneers. She says investors and the industry will profit from more women following the trail she blazed.

Industry research shows just how far there is still to go. In last year’s study on manager gender from fund researchers Morningstar, only 184 funds, or 2% of the roughly 7,700 in the sample, had solo female managers. A further 1,450 funds were managed by men and women. Overall, only 9% of fund managers were women.

This could be a case of what researchers at CFP Board, a trade group for financial advisers, recently called a “feminine famine.” The other revelation in the Morningstar study: The average female manager produced returns in line with the average male, even though they were mostly managing niche funds that had higher-than-average expenses.

Ms. Hirsch, for her part, has beaten the S&P 500 for the past three, five and 10 years.

Whitney Tilson – No One Questioned This Hedge Fund’s Madoff-Like Returns

5) What an obvious scam this was:

How Did U.S. Miss Platinum Partners Red Flags?

In the years before Mark Nordlicht was arrested for what’s alleged to be one of the biggest investment frauds since Bernie Madoff’s, U.S. authorities had plenty of reasons to suspect something might have been fishy about his hedge fund, Platinum Partners.

As far back as 2007, Bank of Montreal accused Nordlicht of helping a rogue trader, costing it more than $500 million. Three years later, when the Securities and Exchange Commission was investigating what it called a “scheme to profit from the imminent deaths of terminally ill patients,” the agency discovered that Platinum had funded the deals. And in 2011, a Florida lawyer who confessed to running a $1.2 billion Ponzi scheme testified that Nordlicht, his biggest funder, lied to help him lure new investors.

And then there were the remarkable profits: 17 percent annually on average from 2003 through 2015, with no down years. The returns were almost as smooth as the fake gains that Madoff claimed year after year, as measured by a popular metric called the Sharpe ratio.

But until Murray Huberfeld, who founded Platinum with Nordlicht, was caught up in a New York City municipal-corruption probe in June, no one at the fund had been charged with wrongdoing. Within weeks of Huberfeld’s arrest, federal agents raided Platinum’s midtown Manhattan office. On Dec. 19, Nordlicht and six others were arrested in what the government called a $1 billion fraud. Nordlicht and Huberfeld have pleaded not guilty, and Platinum’s main fund is being