Hedge funds are no place for public pension investments

By on June 22, 2017 in Uncategorized

San Francisco Chronicle
By Leland H. Faust

In 2016, for an eighth consecutive year, the average hedge fund trailed the return of the benchmark S&P 500 index. That underperformance has averaged more than 5 percent each year. But that didn’t stop the top-paid hedge fund managers from raking it in, regardless of their fund’s poor performance. Last year, the 10 highest-paid hedge fund managers received annual compensation averaging about $765 million.

Why should we care if a few hedge fund managers get fabulously wealthy by seducing the rich to part with their money? If that were the only problem, then we could look elsewhere for reform. But these folks are ripping off hard-working middle-class Americans. More than half of the $3 trillion held in hedge funds nationwide is pension fund and retirement plan investments.

When the managers rake in excessive fees while their funds perform poorly, then either pension benefits will shrink or, in the case of public funds, taxes will be raised to make up the shortfall in the promised pensions.

Over the past eight years, by my estimate, pension plans have cumulatively lost about $600 billion compared with what they could have earned by passive (unmanaged) investment. That’s a lot, and that’s why I have pleaded with the Board of Directors of the San Francisco Employees’ Retirement Fund to abandon its misguided policy of investing in hedge funds.

The leader of the top-paid hedge-fund managers pack, James Simons, took home $1.6 billion in compensation. One of his public funds gained 21.5 percent to beat the S&P index return of about 12 percent, while his other public fund returned 11 percent. No. 2, Ray Dalio, took home $1.4 billion. This despite the fact that his largest fund, Pure Alpha (with assets of about $62 billion), returned 2.4 percent for 2016. The compensation to the remaining top-paid managers came from many funds that underperformed.

Shakespeare asked, what’s in a name? Well, if the name is “hedge fund manager,” the answer is a lot. Just calling oneself a “hedge fund manager” apparently magically entitles that person to compensation far above what any investment adviser or money manager earns.

Just to keep these compensation figures in perspective, the cumulative pay of these top 10 guys was about $7.6 billion, or more than the combined salaries of every professional football and basketball player in the country. This exceeded the combined compensation of the CEOs of all of the S&P 500 companies.

For the most part, hedge fund managers are able to collect this outsize compensation because they have convinced people that they possess special proprietary knowledge that will translate into higher returns. They clearly get an A+ for their ability to attract money and siphon off significant portions for their own benefit. But just as clearly they fail to provide adequate returns for their investors.

How long do hedge funds need to underperform before pension funds (both public and private) stop throwing money at them? When will hedge fund investors wake up and see that the managers’ compensation is no match to their management performance? Common sense would tell us this arrangement should have ended years ago.

But it’s easy to be drawn in when pension fund trustees are investing other people’s money. The lust for imagined riches and the desire to be part of the special fraternity who can invest with a celebrity hedge fund manager are just too much for logic to overcome.

Unless the public wakes up and tells pension fund trustees and others deciding how to invest their retirement funds that these are unsuitable investments, hedge funds will continue to be a fabulous idea for their managers and a poor investment for the investors.

How to Speed Up Play in Baseball

By on June 20, 2017 in Uncategorized

Huff Post
By Leland Faust, Contributor

After the first two weeks of the 2017 major-league baseball season, it was reported that the average length of a nine inning game had increased to about three hours six minutes, or about five minutes more than last season. So it would seem that so far MLB’s efforts to quicken the pace have been a failure. Duh.

Some of the new rules affect things that consume almost no time, while leaving in place practices that when added together consume inordinate amounts of time. For example, the no pitch intentional walk saves about 30 seconds in an average game.

I certainly do not have all the answers, but I have a few suggestions which would clearly speed up play and not affect the game. Let’s start with an easy one which would nibble at the problem. We need a strictly enforced pitch clock with no one on base. The pitcher’s failure to release the ball before time expires results in automatic ball unless the batter prefers the actual play that transpired. (e.g. If umpire signaled that time had time expired while the pitcher still holds the baseball, then the batter is awarded a ball. If time had expired but the pitcher released the ball, then the batter’s team would have the choice of accepting the ball awarded on the umpire’s call for delay or the actual results if the ball was hit into play. Now someone might say this is rather draconian, but are we trying to speed up play or not?

We would also need a pitch clock (with perhaps a slightly longer limit) with men on base, both to assure that pitchers are promptly delivering the ball to the plate and to prevent innumerable throws to first base to hold a runner or to delay so relief pitchers can to warm up in the bullpen.

We need a strict limit on how often catchers can go to the mound and how long they can stay. Similarly, infielders need to be kept off the mound.

Managers and pitching coaches should be prohibited from visiting the mound. It’s usually just an excuse for the relief pitcher to warm up. The only exceptions should be for very clear injuries on a play (e.g. a pitcher is hit by a batted ball, falls to the ground, runs into another player). Alternatively we could set rules limiting the number of times per game that a manager or pitching coach could go to the mound. This number should be small (1 or 2), and the duration of the visits should be strictly limited.

Now for a big one. For each at-bat, once the batter enters the batter’s box he stays completely in. No one foot in and then backing out. No adjusting equipment (battling gloves, batting helmets, elbow guards, etc.) With a pitch clock, the batter will know the pitcher cannot delay and he can be ready without all of the fiddling around which wastes time and accomplishes nothing.

Pitching changes are a very significant source of delay. We need a strictly enforced time limit for the new pitcher to come in and face the next batter. If the pitcher wants to saunter in, all well and good, but then he gets less time for warm-up throws. Again, failure to conform will result in automatic ball calls, say one for every 30 second delay.

We should also consider having less time to change pitchers for the second or third time in the same inning. The pitcher can hustle into the game and quickly get his eight pitches on the mound. Again, I think a solution might be a fixed time limit on the duration of the interval from when the last batter either made an out or reached base and when the first pitch is thrown by the reliever. We should have the umpire call automatic balls in the event of delays. Perhaps as an alternate we could limit the duration of the mound visits both individually and cumulatively. That way a manager who gets his relief pitcher in quickly can make multiple changes in an inning while one who wants to dawdle will be limited and penalized for the time delay.

Major league baseball could also speed up the game by prohibiting the players from spitting on the field, in the dugout and everywhere else. Sure they don’t really waste a lot of time doing that, but think of all the other benefits from that rule change. No longer would players serve as a role model for a disgusting practice that is a health hazard. Spitting in baseball started when players chewed tobacco, but fortunately that is now gone. And please no excuses that these athletes need to spit this because they are running around (nowadays many managers spit too). I never once saw Michael Jordan or Kobe Bryant spit on an NBA court even though they were constantly on the move.

Resistance to change is always strong for those unwilling to be flexible. Do you remember how the old guard said preventing the catcher from blocking the plate would ruin the game? Those folks, of course, were right. It did ruin the game for the orthopedists, but not for Buster Posey nor any of the other major league catchers, the base runners or the fans.

Speeding up the game is the proverbial, if there’s a will there’s a way. But we will never succeed if we are not willing to do away with time – honored traditions that can be redesigned. MLB – welcome to the 21st century.

Is Tom Brady Really The Greatest Quarterback Ever?

By on April 28, 2017 in Uncategorized

Huff Post
By Leland Faust, Contributor

With the NFL draft starting this evening, we have been treated to the annual round-the-clock analysis of who will take whom and which players will be the League’s next stars. But as I think most of us know, the draft is really overrated. Despite the teams spending God knows how much on scouting players in person, reviewing film, and testing for physical attributes (did someone say NFL combine?), we see time and again high draft picks disappointing and lower picks excelling. Does anyone remember the agony the teams were supposedly facing when they had to choose between Peyton Manning and Ryan Leaf? I remember the detailed report in Pro Football Weekly analyzing 10 attributes for quarterbacks and ranking the players from 1 to 10 points for each of the 10 categories. The conclusion was that Manning had a one point advantage over Leaf out of a possible 100 points. Now, of course, we know that Leaf had a briefing career, throwing for a total of about 3600 yards, while Manning retired after a lengthy career and about 72,000 yards of passing offense.

In analyzing the ability of NFL team to successfully pick quarterbacks, we have to look at the 2000 draft. Tom Brady was selected in the sixth round with the overall number 199 pick, with six quarterbacks chosen ahead of him. And how did those six do playing on Sundays? One of them never played a regular-season game, one of them never started a regular-season game, and a third started but three regular-season games. Total career passing yardage for those three: 654. The fourth quarterback was a marginal player at best, having 12 career starts and throwing for about 3200 yards. There were two moderately successful NFL quarterbacks taken ahead of Brady. One had 81 starts and threw for about 17,800 yards in his career, while the other had 95 starts and threw for about 22,800 yards. Brady by contrast, has had 235 starts and has thrown the ball for about 61,000 yards.

Obviously, there are numerous other examples. Joe Montana in the third round and JaMarcus Russell at the overall number 1 pick. But there is something a little different about this discussion when it comes to Brady, for he is in the conversation as to who is the greatest quarterback ever.

Tom Brady led the Patriots to the remarkable (or should we say unbelievable) comeback victory over the Falcons in Super Bowl 51. He won his fifth Super Bowl title as a quarterback and his fourth Super Bowl MVP trophy, both unprecedented. Then the debate started as to whether he or Joe Montana was the greatest of all time (“GOAT”). Great question to kick around over beers (or wine or scotch if you prefer), but I’m afraid impossible to answer. Way too many variables to consider. How does one compare team sport athletes who played three decades apart? The ability to put up numbers changes, rules are modified, stars have different supporting casts, new offensive and defensive schemes are utilized, and the strength of the opposing teams varies. Changes through collective bargaining affect the ability of franchises to keep successful units together.

Is it right to determine the GOAT just by success in the Super Bowl, or should we give more weight to performance during the regular-season? Would Dan Marino be in the conversation if he was playing for the Patriots today or the 49ers in the 1980s? What if Joe Montana never teamed with Jerry Rice (or Ronnie Lott)? Is Brady better because he won four Super Bowl MVP awards instead of the three which Montana captured? Would our answer to be different if Montana also had four Super Bowl MVP trophies? Maybe he could have won another if the voters had named him instead of Rice MVP of Super Bowl 33. After all, if Rice made all the great catches, who was throwing him the ball?

If we just use Super Bowl titles to determine the GOAT, what about our old friend: luck? Montana would probably have five titles too if Roger Craig had not fumbled with less than three minutes left in the NFL championship game with the Giants in 1991. The 49ers had only to run out the clock to win. Protect the ball – two hands – and the 49ers win. Or Brady could have won six Super Bowl titles if the Giants’ David Tyree had not made the impossible helmet catch after Eli Manning’s totally ridiculous scramble and Houdini – like escape from the Patriots’ rush. Or maybe Brady would have only four Super Bowl titles if Seattle had just handed the ball to Marshawn Lynch in Super Bowl 49 instead of throwing the most infamous interception in NFL history. Or perhaps the Falcons would have hosted the Super Bowl championship parade in Atlanta this year if Julian Edelman had not somehow managed to catch a pass about 1 inch off the turf when three Falcons defenders were all around him.

But what the Patriots and Brady really should do is send thank you notes to the Falcons’ head coach Dan Quinn and then offensive coordinator Kyle Shanahan and remind them to file federal gift tax returns for their crazy play – calling and clock management during the fourth quarter. They had the game in hand and gave it away. Does Arthur Blank (the Falcons’ owner) appreciate what his high–paid coaching staff did during the last half of the last quarter? Let’s take a look, knowing that it’s really easy to play Monday morning quarterback. But this is not one of those situations.

We are at 8:26 left in the fourth quarter with the Falcons up 28 – 12; 3rd down and 1 from their own 35. Let’s consider possible outcomes if the Falcons run the ball. Devonta Freeman had averaged 4.8 yards per carry during the regular season and 4.2 yards per carry during the playoffs. Maybe they gain at least 1 yard and then have first and ten at their own 36 or better. What next? How about three more running plays? What possibly could be the result of that? Either another first down, or fourth down and time to punt. Okay, but what does the clock look like then? With good clock management (about 45 seconds elapses per play), about 5:30 would be left. Three precious minutes have vanished for the Patriots. Then, at worst from the Falcons’ standpoint, they punt out of bounds or to the sideline so the punt returner is hemmed in. The Patriots get the ball at about their own 20-yard line trailing by 16 points with about 5:30 left. Then the Patriots would be faced with the problem of driving 80 yards, successfully converting a two-point conversion, recovering an onside kick, driving the field again, and successfully converting another two-point conversion. And they would have 5:30 to do all this. Good luck with that. Oh, and let’s not forget that on those three running plays the Falcons might have made yet another first down and proceeded to run down the clock even more.

Now let’s go back to the time the Falcons could have made the decision to run on third down, but this time let’s assume the 1-yard run attempt fails. The Patriots get the ball back on approximately their own 20 with about 7:30 left, trailing by 16. Still not a place I would like to be.

But we all know the Falcons decided to throw on third and one, Matt Ryan fumbles, and the Patriots recover on the Falcons 25. Sure it’s not likely that Ryan will fumble, and we can certainly chalk that up to bad luck. (Actually, the fumble resulted from Freeman’s complete failure to block which gave the pass rusher a clear path to Ryan thereby causing the fumble.) But with a third and one, why risk a fumble, or an interception, or a sack? Also, why risk stopping the clock on an incomplete pass? And, here the pass play fooled no one, and the Falcons did not even bother to fake a run to hold the rush.

The Patriots received the fumble and proceeded to take advantage of the short field. Remarkably they used almost 2 1/2 minutes to advance 25 yards and score. After the two-point conversion, the score was 28 – 20 with 5: 56 left in the game. Now the Falcons have to go back to work and can no longer play conservatively. With that much time left and a “ one – score game,” they must advance the ball and make first downs while trying to burn as much time as possible. What did the Falcons do? They take possession after the kickoff and acted like they came to play. They rapidly advanced the ball to the Patriots’ 22. First and 10, five minutes to play, eight point lead. Before we review what the Falcons actually did, let’s examine their options. From the Patriots’ 22, they could have run the ball and made a first down. Now more clock would have been eaten up and the Patriots would see their chances go to just about zero. What happens if three running plays don’t result in a first down? With no first down the ball is somewhere between the Patriots’ 22 and 13, and the clock would then stand at just under three minutes to play. In that case, it’s field goal time. Now someone is going to tell me a Matt Bryant field goal is not a sure thing somewhere between 30 and 39 yards. Just for point of reference, over the past 12 years, this established veteran has missed only 5% of his field-goal attempts under 40 yards. And what has he done recently? In 2016 he hit 28 out of 29 attempts at under 50 yards. In addition, during the last four years, he’s made 40 of his 42 attempts at less than 40 yards. So if I were the coach, I’d like those odds.

If Bryant had made the field goal, the Patriots would have trailed by 11 with less than three minutes to play. That looks like a winner for the Falcons. If on the very unlikely chance that Bryant missed that field goal, the Patriots would have taken over on about their own 20 with less than three minutes to go, still trailing by 8. But the Falcons had other ideas. On second down Matt Ryan gets sacked for a loss, stopping the clock. Now it’s third down. Needing lots of yards the Falcons must pass. But this time they get called for holding. They are then out of field-goal range so on fourth down they punt to the Patriots who go on offense with 5:56 to go. We all know what happened then. Would the result of been any different if the Patriots had less than three minutes to drive the field instead of six?

This whole mess gets us back to the question of selecting the GOAT. Is Brady the GOAT because the Atlanta coaching staff needs a refresher course in clock management and probability? Would it be Montana if slight changes in luck had him with a Super bowl edge of 5 to 4 over Brady? When we talk about the GOAT, what about Johnny U, or Otto Graham, or Dan Marino, or John Elway being in conversation with Montana and Brady? (Oh, if the Super Bowl is all that matters, let’s not forget Terry Bradshaw). Let the debate commence.

The Best Financial Advice for NFL Draftees and Startups from One of The Most Powerful People in Sports

By on April 27, 2017 in Uncategorized

Inc.
By Mandy Antoniacci

Picture it. You finally hit that thrilling pinnacle of your lifeˆ–fame, fulfillment, and the fortune that comes with it. And I’m not just talking about some money, I’m talking about the this is a dream come true kind of bank. Seemingly overnight, you went from the monthly financial responsibilities of “roommate-shared rent” and a Netflix account to hiring someone to manage your money – someone you will later discover completely fools you.

While you spend every waking hour committed to perfecting your game, skillful manipulation from someone you trust, just turned your hard earned money into theirs.

This is the kind of manipulation that Leland Faust has seen one too many times.

From professional athletes and entertainers to Wall Street and Main Street, in nearly four decades of managing money, Faust has seen it all. His latest book, A Capitalist’s Lament: How Wall Street is Fleecing You and Ruining America, chronicles his mission to expose such behavior.

Faust founded CSI Capital Management in 1978 and managed a mutual fund which outperformed almost all of Wall Street. Nearly every major news, finance and sports publication such as New York Times, Barron’s, Sports Illustrated, and The Wall Street Journal have profiled his work. For his contribution to the sports community, Faust was named among the “100 Most Powerful People in Sports” by The Sporting News, making him one of only two investment advisors ever to be included.

His lessons apply to anyone – professional athletes, entertainers, startup founders, etc. – who catapult into serious financial means overnight. The week before the NFL Draft, I sat down with Faust to seek his top tips for the newest crop of overnight heroes and future entrepreneurial successes. Here’s his advice:

1. Separate your finances from your agent.
“You don’t want your agent to be involved in your financial life other than negotiating your contracts. Agents, by trade, have no expertise in finances and you don’t want to be getting advice from them, or a firm that they are interested in, or any company that may be giving them a referral fee. Additionally, you positively never, ever, ever give a power of attorney to your agent or a general power of attorney to your financial advisor. That’s where so much of the trouble happens, and people start writing themselves checks.”

2. Look at each contract as the last contract, even if you think you are a superstar.
“The hardest thing for so many people is to resist the temptation to spend everything you get right away. If you plan your savings as if your first deal was your last deal…and it isn’t…great! Then you can have more and more. The idea here is that you want to live like a prince forever, not like a king for the length of your career and a pauper for the rest of your life.”

3. Adopt a two times Harvard Business School method for saving.
“This is particularly applicable for the people who cash out in startups and newly drafted athletes. Let’s say if you’re a 25-year-old person, who of the 25-year-olds in America essentially make the most money. They are the people who go to the top law schools or the top business schools. So, at 25 years of age, they are making, let’s say a couple hundred thousand dollars a year in this world. They are living the good life! But somehow, with professional athletes, a $400,000 a year minimum salary or a $2,000,000 contract isn’t enough. And that’s insanity, right? So, I have adopted, use the two times Harvard business school method in my discussions. If the graduate at Harvard business school is living the good life for $200,000, you could live the good life for $400,000 and save the rest.”

4. Ensure your financial advisor is legally a fiduciary.
“Ask that question directly, are you a fiduciary? If your advisor says, ‘no,’ you say, ‘it’s been nice knowing you.’ If they say, ‘yes,’ then get it in writing. This question is especially critical with athletes because most are less financially savvy. Once you obtain this in writing, then you have to start looking at their approach – is there any promise of higher returns, get rich quick, or that kind of thing? If you hear anything like that, …goodbye! You always want slow and steady. That’s vital. You want somebody who’s balanced, acknowledges uncertainty in the world, and is prepared to deal with it. Someone who can show you real results that comply with the SEC standards for advertising returns.”

5. Set the standard for your team.
“The worst offender in any area of consumption is the biggest offender. It sets a standard for the entire team. You don’t want that. Understand the power is saving money not spending money. The reason behind this is because you can control your destiny. If you save your money and have assets, you decide what to do, if you don’t somebody else tells you what to do.”

One Of The World’s Top Financial Advisors Says This Is The Best Way To Invest Your Money

By on March 31, 2017 in Uncategorized

Forbes
By Kevin Kruse, CONTRIBUTOR

Would you like to cut through all the Wall Street bull and know the right way to invest your money? There’s so many people out there telling you they know what’s best, from the financial media to whoever’s playing on the hot trend of the moment. But who really has it right?

Leland Faust is an author, speaker and a triathlete — and he’s also the founder of CSI Capital Management, where he used to supervise over 1.5 billion in assets for 30 years. He’s been named a Barron’s Top 100 Mutual Fund Manager, and was more recently named as a Top 100 Independent Investment Advisor. His new book is A Capitalist’s Lament, which unmasks the Wall Street firms as entities that mislead us, overcharge us, and often expose us to too much risk. I really encourage anyone who’s interested in not just their own money but literally the future of America to read this book.

Investors Lose Retirement Protections

By on March 9, 2017 in Uncategorized

San Francisco Chronicle
By Leland H. Faust

Donald Trump ran on a populist platform. That is, when he was not ranting about immigrants bringing in drugs or raving about his TV ratings. As for government, he promised to drain the swamp in Washington. We’ll see. But what about the swamp on Wall Street? Not so much. Exhibit A: administration plans to derail the fiduciary rule for retirement plans. Apparently, the noxious greed of the nation’s financial establishment is safe from Trump’s dredging, in this case, at the expense of retirees, many who voted for him.

Leland Faust Featured on C-SPAN

By on March 9, 2017 in Uncategorized

C-SPAN

A Capitalist’s Lament Leland Faust talked about his book A Capitalist’s Lament: How Wall Street Is Fleecing You and Ruining America, in which he argues that regular Americans are being fleeced and exposed to high level risks by Wall Street financial firms that are only interested in increasing their own bottom line. Mr. Faust spoke with Roy Eisenhardt.

Financial Advisor Writes Book

By on March 9, 2017 in Uncategorized

Sports Business Journal
By Liz Mullen

Leland Faust, who has spent more than 30 years as a financial adviser to hundreds of athletes, has written a book that takes on Wall Street practices.

“A Capitalist’s Lament: How Wall Street Is Fleecing You and Ruining America,” published by Skyhorse Publishing, will be available online and in bookstores today.

A Capitalist’s Lament: How Wall Street Is Fleecing You and Ruining America

By on March 9, 2017 in Uncategorized

Stockerblog – The Stock Market Blog

Rarely have I found a non-fiction book that is a page-turner, but the book A Capitalist’s Lament: How Wall Street Is Fleecing You and Ruining America is one of those books. The author, Leland Faust, goes into detail about how investors are being taken by Wall Street.

Don’t get the author wrong. He is not anti-capitalist, he is what I would call pro-moral capitalist (which is also how I would describe myself, by the way). He is just bringing to light all the ways that the average person is being taken advantage of, on a financial basis.

Although I am familiar with what he covers on a general basis, the author covers the specifics, everything from over charging to fraud. For example, Chapter 2, called Big Is Not Beautiful, is significantly devoted to Goldman Sachs. He points out 37 different instances of fines, security violations, and other issues of the firm.

Pros and Cons of Closed-End Funds

By on March 9, 2017 in Uncategorized

U.S.News & World Report
By Jeff Brown

Most investors know how mutual funds work: investors’ money is pooled and used to buy assets like stocks and bonds. If all goes well, the fund’s share price rises and investors can cash out by redeeming, or selling their shares back to the fund company.

Share price, or “net asset value” (NAV), is figured by the fund company after the market closes each day, by dividing the total value of the fund’s assets by the number of shares outstanding.

But there’s an alternative — closed-end funds, or CEFs.