Madoff deals Profond only a glancing blow
The quality and transparency of Profond’s investment portfolio are faultless. Despite the sluggish economy and hesitant stock markets, the potential to generate value is retained. Thanks to the proportion of contributions to benefits, the duration and impact of the economic slowdown pose no critical risks to Profond. For this reason, Profond can avoid expensive, risky hedging of stock market and currency fluctuations via derivative products and hedge funds, and has not suffered any definitive asset losses due to the collapse of investment instruments.
We received the following statement from the asset manager responsible for Profond, PK Assets, concerning the Madoff case.
“Madoff” is a complete and accurate description of hedge funds:
Mad in the sense of crazy, insane, ludicrous
Off in the sense of gone, departed, disappeared
This latest case of client funds that have vanished into thin air on an epic scale cannot simply be shrugged off as the result of unusually high value fluctuations on the financial markets. No – this case goes much deeper, direct into the heart of modern financial capitalism. Confidence in the guidelines for economic activity on the financial markets and in market participants has been shaken to the core. After the business model of so-called investment banks was discredited, the guild of hedge funds now stands in the line of fire. Laymen and professionals alike have expressed their astonishment at how it was possible for a company that advertised itself as subject to particularly high ethical standards to produce a snowball effect capable of cancelling out the sophisticated selection algorithms used by highly paid specialists and generating a loss estimated at three times the assets announced by the institution.
Suppliers of traditional investment solutions are rubbing their eyes in disbelief. The business model of leading alternative investment providers obviously consists of collecting money, transferring it to remote locations for a hefty fee and proceeding, based on secret calculations, to promise stable, double-figure annual returns that are backed up by “past performance” with the help of a laughable auditing apparatus. These mechanisms allowed Madoff to generate a loss amounting to more than ten times that incurred in the LTCM debacle. Nevertheless, this kind of approach is no longer deemed a hazard to the system. The public has been numbed by all the news of high writedowns, recapitalizations, nationalizations and anticyclical, astronomical salaries flying around. To top it all off, the guidelines for these investment instruments and the playgrounds of the consultants who offer them are now being blithely expanded in the case of investment of pension fund assets in Switzerland.
It is inappropriate at this juncture to delight in Madoff’s fall. Instead, it is necessary to return to tried-and-tested combinations: value is generated by activities in the real economy and the production of meaningful goods, while returns are “hard-earned” through fluctuations. In his shareholder’s letter of 2006, Warren Buffet, the oracle of Omaha, taught us how risky it can be to put one’s trust in investment consultants who try and get around these basic paradigms. However, this is no new phenomenon. It is well known that in medieval times, alchemists who were urged to transform worthless materials into precious metal were also the best-paid specialists. We must therefore assume that the Madoff case will not be the last of its kind.
Profond does not invest in hedge funds. The aims of this supposed asset class are irreconcilable with Profond’s asset management principles, which demand stakes in value-generating production components of the global economy. These grotesquely expensive financial products are not transparent enough, harbour too much risk and are subject to questionable incentive mechanisms. Using these products would contradict the avoidance of leverage and short selling as outlined in Profond’s investment regulations. Nevertheless, Profond's portfolio is suffering from the development of these financial vehicles. Deleveraging in all asset classes is also making its mark on Profond’s short-term investment result. It is foreseeable that the excesses of the financial sector combined with the misallocation of scarce resources will negatively impact economic growth in the coming year.
However, the central and decisive factor is that Profond’s assets – consisting exclusively of high-quality shares and bonds – have retained their value and should reap above-average benefits from a recovery in prices. The cumulative mistakes in the financial sector – securities from big banks, structured Lehman products, low-quality corporate bonds, yield optimization products, total return products and all types of credit derivatives – have left Profond unscathed. Nevertheless, the differences between value fluctuations and losses, and the arbitrary way in which the coverage ratio of a pension fund is assessed based on a specific key date, have been highlighted by the current situation. Profond is sticking to its guns and is therefore not in search of recovery strategies.
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