Mod note: Blast from the Past - "Best of Eddie."
A big hat tip to The Reformed Broker for finding this gem.
Imagine becoming a hedge fund manager with no formal training whatsoever. It's the dream of every early finance major at some point. Skip all this BS school and the debt that goes along with it, just publish my own research on Seeking Alpha, and let the money come rolling in, right? Well that's exactly what Andy Zaky did - and it cost his investors every penny they sent him.
To be fair, Zaky first established himself as a sort of AAPL wunderkind. Though he had no formal training in financial management or analysis, he did graduate from UCLA and UCLA Law School. He took to writing about Apple on Seeking Alpha and developed a healthy following because of the accuracy of his predictions. He claimed to have learned all he knows about stocks and finance from the Internet.
Then he started a subscription newsletter which was all AAPL, all the time. At first he charged $49 a month, but when the newsletter grew even more popular he raised the price to $200 a month - and still signed up 700 subscribers. I'll give you a minute to do the math on that.
Meanwhile, AAPL kept burning up the index and making Zaky look like a genius. So he did the only thing a rational newsletter publisher could do: he started an all-AAPL hedge fund.
Fuh...what???
Yup.
With a minimum investment of $250,000, Zaky quickly signed up 28 LPs (at an average of $378,000) and then raised the minimum to $500,000.
You can probably guess how the rest worked out, but it's worth reading the article to see just how badly the wheels fell off. To make a long story short (no pun intended) Zaky bet the ranch on AAPL calls while the stock went into the dumper and he lost every penny. To make matters worse, the Joe Six-Pack's who didn't have the money to join the hedge fund but traded off his advice from the newsletter lost entire retirement accounts. Oops.
It's a pretty fascinating tale, really. Only in the Internet age could a guy like this make this happen as quickly as he did. I'm not saying that there weren't no-name analysts who made it big before the Internet - there certainly were. But the Internet tends to speed the whole process up and, once you're Internet famous, it has to be difficult to resist the temptation to cash in on it. I have no doubt that Zaky's intentions were pure, but this is what happens all too often when you start believing your own press.
So be honest - how many of you are now inspired to start writing for Seeking Alpha in a bid to avoid the whole two-year analyst grind in the hopes of a jump to the buy side? Two percent of $10 million AUM is still $200,000, which is nothing to sneeze at. Not to mention the $140,000 a month you're pulling in monthly newsletter subscription fees.
If Zaky proves anything, you don't even have to know what you're doing...
I used to see this dude's stuff on Seeking Alpha and said to myself...surely no one takes the Apple fanboy seriously and stopped reading his stuff. hah
So SirTradesaLot - when should we expect your new newsletter?
What blows me away is that people were handing over this kind of money to someone covering 1 stock. You would think if his client base came from seeking alpha they would have some idea about the investing world.
Yours for $400 (plus commission)!
This is one of the best puns I have heard to date. People that don't appreciate puns should be pun-ished.
(sight puns are acceptable on the internet)
If I hadn't read the article, and only read this one line, I would've called you crazy for suggesting that such a strategy could work. Wow, just wow. Anyone have any contacts at Seeking Alpha? Apparently, I need to get a writing gig there immediately.
Even better, let's combine this idea with the fax scam you came up with earlier. Create multiple accounts on seeking alpha, write highly specific, contrarian opinions on a bunch of stocks with each account and wait until you hit one. Look like a genius and start your own newsletter. Milk it for all it's worth until everyone figures out you don't know anything.
Absolutely brilliant in concept. Key is to not get called out as being the same guy behind each pitch.
Or you could just write for motley fool.
If everyone associated with MF got put in front of a firing squad tomorrow I wouldn't have any complaints.
The stock market, it's where popular delusions go to die.
Why, oh, why would you pay two and twenty for someone to buy AAPL? Haven't these people heard of Scottrade or Interactive Brokers? It baffles the mind. I suppose the marketplace is designed to separate fools from their money in the most peaceable way possible, so I guess this nets out for society's general benefit.
People pay that for Paulson to buy GLD for them
Technically, there is also some stock selection in the Advantage Plus Fund. But, to the extent that is true and GLD is a big position (which I've heard it is), they've lost money to this point (and will always underperform GLD net of fees). Just because its a big fund doesn't make it any less stupid.
.
Also, Eddie, why isn't this entitled- "How NOT to Start Your Own Hedge Fund"?
Too easy. Besides, he made money even if his clients lost all theirs. Isn't that the definition of a hedge fund?
Confirming this definition.
No, he strikes me as the kind of idiot who probably piled his own cash into the fund.
Actually, it doesn't seem he could have made that much, if any, money. Assuming: 1) he was charging 2% and 20%; and 2) he had all $10.6M at inception (he didn't, but for simplicity's sake), the math suggests only negligible amounts of fees. The article said that he started his fund in late 2011. First, he started losing money immediately, so that decreased his AUM and thus management fees. Second, he got zero, I repeat- zero, in performance fees because he already lost most of the money before AAPL tanked. There was no way he, personally, could have pulled out with much. I would be surprised if the Fund netted $50,000 in management fees.
Before someone says- "Hey, $50,000 isn't a bad reel". Two things- $50,000 wouldn't cover the operating costs (excluding legal expenses) of a proper Fund, so this thing was a cashflow-negative operation throughout its brief lifespan (if you read the article, you'll see that the Fund was actually in debt in the end). Second, this guy's reputation is totally shot. There isn't really a price to put on losing one's reputation- but if you had to, it would probably be for more than 50 grand.
Lastly, I take exception to the notion that hedge funds, at their core, are parasitic. When hedge funds were exotic alternate asset classes (rather than the well-oiled, fee-generating unregulated mutual funds they've become), they were actually useful to both their clients and to the economy at large. They could generate an 'alternate' opinion. Their structure was designed specifically not to be a mutual fund and emphasize performance. Now they are part of the financial machine. As such, when there is a clearing out via a financial catastrophe, there will be fewer Funds, but they will be of a higher quality. When done properly, finance, and particularly hedge funds, can successfully pursue noble goals while making money for their clients.
But, perhaps you were just being flippant in which case :-)
Thank me later.
http://icg.citi.com/transactionservices/home/demo/tutorials29/HedgeFund…
Or give me a silver banana :-)
Thanks!
AND +1! :)
I know very little about finance as I've just started my ungrad course, but the first thing I learn about is portfolio diversification. Investing hundreds of thousands of dollars into one stock sounds frankly, quite stupid. As a learner I want to ask: where is the sense in what he did? Don't get me wrong, I understand that AAPL was (and is - let's not talk about it) a really really great stock. But hey, what do I know, I know very little about finance as I've just started my undergrad course.
On a related note, does anyone have "templates" or examples of documents used by PE MFs to raise funds?
Holy shit... Why would anyone trust this guy, even if he predicted a few moves in AAPL? One of the most basic/first things you learn about in trading/investing is to diversify your PF... And this guy does the complete fucking opposite and almost brags about it.
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