Legendary hedge-fund manager Leon Cooperman wasn't pulling any punches as he sat for an interview in front of about 100 members of the hedge fund industry.
First he lambasted the Securities and Exchange Commission (SEC), calling it abusive and mean. Then someone asked what he thought of private equity.
"I think private equity is a scam," said Cooperman. "They're getting very fancy fees for sitting on your money.
The founder of the Omega Advisors hedge fund spoke before the New York Alternative Investment Roundtable at New York's Penn Club Wednesday. He said private equity's high returns "have been aided and abetted by lower interest rates." He added that low interest rates were the main reason leveraged buyouts have been able to charge high fees in a fairly valued market. He also pointed out that it's going to get a lot harder for the private equity industry as this is no longer an under-discovered concept, there's much more competition, and that rising interest rates would hurt new deals.
Cooperman spent the first 25 years of his career at Goldman Sachs, becoming a general partner after nine years. Attributing his success to intuition and hard work, he said in 1972 he took over Goldman's unrated research department and turned it into Wall Street's number one house in equity and credit research. He also served as chief executive of Goldman's $1 trillion asset management division and chief investment officer of its equity product line.
In 1991, he went out on his own to start Omega Advisors. One of Omega’s funds, Omega Overseas Partners, posted 12.6% annualized net returns since January 1992, according to The Wall Street Journal. That beat the 9.6% annualized rise in the S&P 500 during the same period.
His consistently high returns put him on Forbes magazine's list of the “40 Highest-Earning Hedge Fund Managers” and its "Top 10 Overall Hedge Fund Managers” list.
In 2016, the SEC charged the hedge fund and Cooperman with inside trading. Instead of settling and accepting a ban from the financial services industry, he fought the charges to save his reputation. The next year, he settled the case without admitting wrongdoing or agreeing to any industry ban. He was forced to pay a fine, but Omega was allowed to stay in business, which many considered a victory for Cooperman.
Unfortunately, he lost a lot of investors, and by 2018, Cooperman decided to close shop and turn the hedge fund into a family office. He told the audience the Kenny Rogers line, "you have to know when to hold them, and when to fold them." He added he didn't want to spend his remaining years chasing the S&P 500 Index for other people.
Asked about other trends in the financial industry, Cooperman said, "I think negative interest rates are the dumbest thing I've seen. It makes no sense."
On the value of index funds versus hedge funds, he said, "In 2008, if you told me it was better to be in relative return vehicles (index funds) rather than absolute return vehicles (hedge funds), I would have said you were crazy."
But over the last decade index funds have far outperformed hedge funds.
He said index funds have much more liquidity and a smaller fee structure than hedge funds and that if hedge funds can't present a value opportunity their businesses will shrink.
Asked whether index funds were in a bubble, Cooperman replied that there were much fewer stabilizers in the market than when he started.
"One of the biggest problems we are all facing now, and it scares the hell out of me, is market structure. There are no stabilizing structures. The market structure is totally different than anything we were brought up with in the past," he said.
He pointed to the Volker rule, which prohibits banks from using their own accounts for short-term propriety trading of securities and derivatives.
Instead of specialists or banks making bids that could slow down the trading, "there are no stabilizers left in the market," he said.
Cooperman said he sees the market as fairly valued and not a good place for a value investor.
"I believe in any stock at the right price," he said. "Not the right stock at any price."
However, he doesn't think the market is in a bubble because he said he sees very few signs of euphoria.
"The bubble is in fixed income, not equities," he said.
