In a break from whistle-through-graveyard business as usual, Cameron and Tyler unconvincingly pitched Bitcoin

September 19, 2013 — 5:47 PM by Dina Hampton

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Here’s the thing about hedge fund managers: It’s all about the money — making it and preserving it. That mission differs from financial advisors who, in addition to making money for their clients, serve as human lightning rods that absorb the emotional and spiritual dislocation associated with having and keeping wealth. See: What is the value proposition of a financial advisor — and how is a budding RIA culture upping the ante?.

Since hedge fund managers have one thing to do and charge dearly for it — at 2% of assets and 20% of gains, more than any other financial advisor or asset manager — you’d think that they would be excellent at making money for clients.

It turns out that — at least as an industry — they’re not. The strategy, marked by the holding of long and short positions to hedge against loss in down markets, turned in a very anemic 4% this year through Aug. 9 (this according to a study by Goldman Sachs referenced in a recent Wall Street Journal article). The prolonged bull market has been unkind to hedge fund managers; the S&P 500 lapped hedge funds with 20% returns in the same time period. See: The truth about hedge fund risk.

Yet more hedge funds, with an expanded menu of strategies falling under that rubric, have come on the scene in the last few years. The result may be that formerly above-the-fray firms (when I started on the business beat in 2004, many funds didn’t even deign to list their phone numbers) will be forced to compete for the same fat-cat investor dollar.

The fact that a decades-long ban on hedge fund advertising will be lifted later this year doesn’t help matters. All this could lead to a worst-case scenario already being bandied about in business and trade publications: That the days of the unquestioned 2% and 20% rate are numbered.

Game faces

With this in mind, I signed up to cover the Ninth Annual New York Value Investing Conference earlier this week. Its Warren Buffett-evoking name notwithstanding, it’s where hundreds of hedge fund executives and managers converge. This year it was held in the sleek Frederick P. Rose Hall in the Time Warner Center, home to Jazz at Lincoln Center, the city’s premier jazz venue. Hedge funds are associated with glamour and the venue reflected that gloss.

I was poised to hear what a bunch of contrite hedge fund experts had to say about finding redemption — ahead of investors seeking refunds. See: 8 reasons why the hedge fund industry deserves a second look in 2013 and why RIAs are so well positioned to capitalize.

What I observed instead was parade of hedge fund proprietors delivering PowerPoint-synchronized talks, discussing macro- and microtrends and best picks of undervalued companies. If any of the 200-plus attendees were at all spooked by the fact that conference coincided with the fifth anniversary of Lehman Bros.’ collapse, there was no sign of it — even if one presenter did briefly flash a disclaimer on the overhead slide before beginning his address to his peers.

Enter the Winklevosses

Then, on the second day, conference organizer John Schwartz of Tilson Information introduced his most high profile “get”: Tyler and Cameron Winklevoss, entrepreneurs and Olympic rowers. The twins however, are far more famous as litigants who sued Mark Zuckerberg for allegedly swiping their Facebook idea, as immortalized in the 2010 movie “The Social Network” — in which the twins were skewered by former Treasury Secretary and then president of Harvard University, Larry Summers.



Improvisation was in short supply at

the 9th Annual Value Investing Congress

held at NYC’s toniest jazz venue.

In real life, the brothers sued Zuckerberg, claiming they had invented Facebook, settling the suit in 2011 for millions in cash and Facebook stock. Recently, as partners in Winklevoss Capital, they have taken strong positions in Bitcoin, a controversial online currency. In July, they filed with the SEC to create the Winklevoss Bitcoin Trust, a proposed ETF-like exchange for the digital, non-state affiliated money. See: Why sudden wealth at Facebook is gushing into a $17-billion RIA and triggered a merger of two DFA giants.

But any dreams of picking up some good Zuckerberg dish were quickly dashed.

“If you came to hear us talk about Facebook you came to wrong place,” said Tyler.

Dressed to shill

The brothers presented themselves wearing dark suits and pastel shirts to show their Wall Street side but were tie-less, perhaps to display their Internet cred, and wore top-siders, presumably a nod to their Olympic-level sports prowess.

Schwartz acknowledged that he had booked the Winklevosses as something of a novelty act to wow hedge fund managers but realized an unexpected benefit of luring reporters channeling their inner paparazzi.

“Every once in a while we get a reaction that surprises us. Reporters got in touch and they were aghast. Why? We want to be an inclusive church and take in all sorts of people. They are smart young men who created a lot of value and they may have some interesting things to say. It’s something different.”

It wasn’t just reporters. The attendees, until then unmistakably nonplussed, perked up as the Winklevoss twins took the stage. The presentation, in the nature of a Bitcoin tutorial, started with thoughts about its creator, Satoshi Nakamoto — perhaps.

“We’re not sure if he does exist,” said Tyler. “He, she or they left voluminous body of work. He seemed frustrated with system that crashed. You don’t need to know who he is, you don’t need to trust him to do business with him.”

Brain wallet

The brothers went on to tout the advantages of Bitcoin over traditional currency — it’s durable, portable, almost impossible to counterfeit and can bypass the “legacy rails” of transmitting money. “You can shoot money across the Internet free and instantly,” said Tyler. See: Top 10 alternatives to alternative investments for RIAs: 2013 edition.

They also floated the use of Bitcoin to help struggling foreign economies. “Last year there was a financial crisis in Cypress as I’m sure a lot of you guys are familiar with,” said Cameron. “A lot of people were apprehensive about storing money in banks and the banks took a haircut” A screen shot of a woman getting a haircut flashed above the stage. See: Column: Europe is the opportunity of a generation and the time to invest is now.

“With Bitcoin there are no bail-ins like in Cyprus,” said Tyler.

The brothers pointed out that Bitcoin is difficult to appropriate as, before it is spent, it doesn’t exist.

“In 1933, FDR ordered citizens to return gold or pay a fine,” he said. Bitcoin, having no physical mass, can be stored online, or even in one’s head with the use of a 12-word passport or “brain wallet.” A screen shot of Federal Reserve chief Ben Bernanke appeared above them as the brothers suggested that Bitcoin could be used as a “hedge against the Fed.”

Government approval pending

It was around this time that murmurs in the audience could be heard. In the Q&A that followed, the attendees peppered the Winklevoss’s about the probability of the U.S. government allowing a competing currency to exist.

The brothers acknowledged that their proposed Bitcoin exchange was a long way from receiving government regulation, though when asked how long, Tyler posited six months, looking doubtful he said it. Maybe 12. See: Startup firm bets its ETF research technology can cut out the middle man for advisors.

An audience member asked: Since the creation of an alternative currency is illegal, wouldn’t it therefore be illegal to distribute it?

That could be the case, they allowed, eliciting pockets of nervous laughter from the spectators. “But if government wants to shut it down it would have to shut the Internet down. So is it worth fighting it or working with it. Doesn’t make sense to fight it so governments will work with it.” They reiterated: “To shut down Bitcoin is to shut down the Internet.”



The Winklevoss twins, who are starting

an ETF exchange for Bitcoin, competed

in the men’s pair rowing event

at the 2008 Beijing Olympics.

What about money laundering and the possibility of using Bitcoin to fund terrorists?

The anonymity of Bitcoin is overstated, said Tyler. It’s like owning the Mona Lisa. At some point you can trace it. You have to cash it out to buy AK47s. In that sense, the risks are the same as with cash. Cameron emphasized that Bitcoin owned is untraceable but that every transaction is public.

it’s possible that “the U.S. could regulate it and clamp down but doesn’t mean it couldn’t work everywhere else in the world. Maybe you couldn’t own it— but how could they prove it?” asked Tyler. See: Tamarac CEO: Mark Spangler’s big trouble with the feds won’t harm Tamarac.

The clacking of journalists’ keybords’ intensified as the Winklevoss’s took their bows and the meeting adjourned.

Bright guys

At the mid-morning break immediately following, the consensus was that the Winklevoss brothers had delivered a diverting 35 minutes, even if the chances were slim that their exchange of a virtual, parallel currency would take hold in a big way anytime soon.

John Paffendorf, partner in a $900 million Private Wealth Management boutique that operates within Morgan Stanley, had a one-word reaction to Bitcoin: “Illegal.”

Paffendorf, a regular attendee at these conferences, said it was the first time he could recall a presentation of a public security offering. The Winklevoss’s pitch was self-serving, he said, but then again, so were those of all the other speakers, albeit in the service of more traditional alternative products. See: A more liquid alternative to alternative investments catches on.

Mohan Plakkot of Valsef Capitol, based in Quebec, had listened with interest as his company holds Internet assets, but believes that at present there are too many regulatory barriers and other unknowns to think seriously about investing in Bitcoin.

“They have a huge position, this is a way to push it,” he says. Still, Plakkot thought the presentation would have been more appropriate at a technology conference.

“I was surprised it was included,” he said. “Still it’s something people like to talk about — and not something they need to make a decision about.”

Cameron S. Epard was an atypical attendee in that he’s not in the hedge fund business. Rather, as president and co-founder of AirStream Energy, a wind farm developer based in Colorado, Epard has attended the conference for the last few years to get fund and stock ideas for how to invest his firms’ profits — and enjoys the process so much that he’s thinking of starting a fund.