Monday, March 24, 2014

Raising a Global Macro Fund: DSK’s Latest Dalliance

Raising a Global Macro Fund: DSK’s Latest Dalliance

Late last week, the financial world learned that Dominique Strauss-Kahn, the former head of the International Monetary Fund plans to raise $2 billion for a macro hedge fund.[1]  Mr. Strauss-Kahn, who is of chairman LSK & Partners, a boutique investment bank, will manage the fund along with his daughter, Vanessa Strauss-Kahn.  The announcement was widely disseminated because of Mr. Strauss-Kahn’s encounter with a maid at the Sofitel Hotel in New York.  If Mr. Strauss-Kahn can raise the hedge fund, the management fee will more than cover the purported $6 million settlement with the maid.
Last Days (2000)
LSK is in the throes of a global fundraising effort to raise capital for the fund.  Much of the media has wondered about Mr. Strauss-Kahn’s efforts to raise the fund, given his sexual dalliances and legal entanglements.  In my view, his personal life isn’t the biggest obstacle.  The real problem is that Mr. Strauss-Kahn and his daughter have no experience managing money.   In other words, they are trying to raise a fund without any kind of track record.  Moreover, there’s no evidence that Mr. Strauss-Kahn will give up any of his myriad of advisory or speaking engagements, which seem to take him all over the globe.  Hiring a money manager who lacks experience, has a myriad of other interests, and employs a family member as a partner violates almost every principal of sound due diligence.  Nonetheless, I’ll bet that they can raise the money.

While LSK’s marketing pitch isn’t available, their press comments are rather curious.  The fund is being marketed as a conservative offering that won’t apply any leverage.  This isn’t much of a selling point, because most macro funds don’t use leverage.  That doesn’t make them low risk.  A macro fund makes directional bets on the probable course of interest rates, currencies, commodities, and/or equities.  Moreover, these positions are often established using derivatives.  As a result, macro funds are among the more volatile offerings in the world of hedge funds and are a prime reason the word “hedge” in hedge funds is so inappropriate.

Naïve investors think hedge funds necessarily limit or control their exposure to financial markets.  While many hedge funds do indeed hedge their bets, the universe of hedge funds is full of offerings that are unabashedly long or short all sorts of markets.  The hedge fund is in reality a lightly regulated investment vehicle that can do just about anything as long as it is properly described in the investment offering and doesn’t amount to fraud.  

Hedge Fund Research just reported that 2013 was a relatively tough year for fund startups, as investors tended to make commitments to experienced managers.[2]  Mr. Strauss-Kahn’s lack of experience isn’t likely to be an impediment.  His access to world leaders will most certainly draw clients even though there’s no evidence that his connections will lead to moneymaking ideas.


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