Jarislowsky takes aim at investor 'scum'

Date: Wednesday, May 23, 2007
Author: Diane Francis, Financial Post

Never one to mince words, Stephen Jarislowsky says he dislikes hedge funds so intensely that he refers to them as "scum."

In a recent luncheon interview in Toronto, he took aim at this growing phenomenon. Always interesting, Jarislowsky, president and CEO of Jarislowski Fraser Ltd., was in great form and sharpening his verbal skills in advance of his acceptance speech at the Business Hall of Fame awards in Toronto.

"The hedge funds are a bunch of scum who make deals fast and force companies into taking short-term decisions whether they are in the best interests of shareholders or not," he says.

There are other serious issues arising from hedge funds that governments have yet to recognize, much less deal with. Hedge funds ignore disclosure requirements by hiding behind Cayman Island addresses, which means they can take large positions in the market without anyone knowing who or what or how much is involved. This adds to volatility without justification.

But the funds add no value whatsoever to capital markets or the companies they invest in, Jarislowsky says.

Hedge funds bet up and/or down. They are in-and-outers, hit-and-run artists without any long-term interest in building or restructuring or improving.

That's why Jarislowsky thinks that they, and other newly minted shareholders, should be denied votes until they remain shareholders in a company for a reasonable period of time, say one calendar year before the annual general meeting.

This will mean that managements and boards can run their businesses, on a long-term basis if need be, and without looking over their shoulders because temporary tyrants want to call the shots.

"An organization I'm involved with, the Quebec Institute for Corporate Governance, has come out with a policy proposal that nobody should have a vote unless they have held the stock for a certain period of time," he says.

The hedge fund phenomenon is the result of a generation of low interest rates and huge global liquidity. These funds have tapped huge pools of capital and their founders/managers have made some of the biggest fortunes around.

In many ways, they are akin to the greenmailers that preyed on corporations decades ago until regulators stopped them. They would buy pieces of companies, threaten takeovers and go away after being paid a premium, or bribe, to do so.

What stopped them was requirements such as follow-up bid requirements, meaning they couldn't get a premium for their block of stock unless the identical amount was offered to all other shareholders.

That rule stopped greenmail in its tracks, but not before lots of marauders made lots of money.

Today, hedge-fund artists are similar.

Exempt from disclosure requirements, they swarm around a stock, betting long or short, and then pounce on its management to make changes to revise stock values that may or may not be in the fiduciary interests of all shareholders.

Another problem is the hedge fund operatives get up to 20% of the action, which has made many fortunes, but also sown the seeds for mediocrity. Rewards have been so great that they are being diminished because there are now too many mediocre imitators in the field. That's why they are now dubbed the "hedge hogs."

In the 1990s, the compound annual return for hedge funds on average was an impressive 18.3%. Since 2000, that has fallen to 7.5%, according to The Economist. At the same time, fees are higher.

The problem is simply supply and demand -- the creation of too many funds chasing the same, or a slowly growing, number of profitable transactions.

Hedge Fund Research data calculated that in 1990 there were 610 hedge funds with US$39-billion in assets; by 2000 there were 3,875 with US$490- billion; and in 2006, 9,000 hedge funds with US$1.3-trillion in assets. Most are posting diminishing returns.

Besides Jarislowsky, there are other critics. Here's Warren Buffett on the hedge hogs: "I tell you what I think of hedge funds. Hedge funds are a huge fad," he said last fall.

"You can pick any 10 hedge funds and I'll bet that on average they will underperform the S&P over the next 10 years.

"You can't create more money out of American business than the business creates itself," Buffett says, "so most of these hedge funds will not be able to justify their outlandish fees over the long term and they will disappear.

"On Wall Street there are innovators, imitators and total incompetents. I'm afraid that the majority now are run by the later two categories of people."

Jarislowsky is so exorcised about this that it has even led him to cautiously endorse multiple- voting stock because this structure amounts to a hedge fund repellant.