1 Boring Old Man

^{from New York Times}

Hedge Funds, Unhinged

^{Kenneth C. Griffin, the head of the Citadel Investment Group, whose funds lost roughly $10 billion last year. Citadel has blocked some withdrawals. LAST summer, Kenneth C. Griffin and his wife, Anne, hedge fund managers both, were so rich that they did something most wealthy couples don’t do until much later in life. Still in their 30s, they hired a Ph.D. student in economics to help dole out their money to charities.}

^{Fast-forward six months, and Mr. Griffin, who built the Citadel Investment Group into one of the largest hedge funds in the world, has seen the value of his funds plunge by roughly $10 billion — one of the biggest amounts lost in the hedge fund carnage last year. He was down 55 percent while the average fund was down 18 percent. For Mr. Griffin, it is a failing as personal as they come. Sitting back in his chair, gazing uneasily at the skyline here, he points to a new patch of gray hair when asked about the toll of his losses.}

^{“Last year was a dramatic year for the world’s largest financial institutions,” he says. “We were not immune.” Mr. Griffin has basked in praise — whiz kid, wunderkind, the next Warren Buffett — ever since he began trading from his Harvard dorm room 20 years ago and then moved to Chicago to start his hedge fund. In recent years, his firm handily took in more than $1 billion annually. But now, the whiz kid has lost so much money that it is unclear whether he can make it all back. That reality is playing out among thousands of troubled hedge funds drowning in losses.}

^{Two out of three hedge funds lost money last year, and according to agreements with investors, their managers are supposed to recoup all losses before they start skimming fees from their profits again. That could take years. And it’s unclear whether these traders, so accustomed to flush times, will stick it out long enough to make investors whole again…}

^{Assets held by hedge funds surged to nearly $2 trillion as of the start of last year, from $375 billion in 1998, according to estimates from Hedge Fund Research, a Chicago firm. Along the way, hedge funds — once so few in number that they represented a boutique industry populated by a rarefied group of specialists — sprang up like kudzu. Today, there are around 10,000 hedge funds, compared with around 3,000 a decade ago and just a few hundred two decades ago.}

^{Little other than money unites hedge funds, which invest in areas as varied as bonds, aircraft and small-business loans. They even make bets on the weather. What they have in common are lucrative fees: managers typically charge 20 percent of profits and 2 percent of total funds under management — the latter of which they earn regardless of performance. The wealth and power of hedge funds, and those handsome fees, were predicated on what now sounds like a hollow promise: to make money year in and year out.}

^{But the years of easy money are over…}

A month ago, I had my say about "making money." I don’t believe you can make money. You can take money, and earn money, but you can’t make money. If gambling is your game, why not simply go to Nevada and set up shop as a professional gambler? I think that question has an answer. The Vegas Casinos offer games with known odds. If the odds are too weighted against the bettor. no one will play. If the odds are too close, then the house will make no profit or go under. So, over time, certain games have hit the correct zone, and they’re the ones that endure. But what about a game like blackjack where the house plays a fixed conservative strategy? How does the house win? Because, over time, the gambler will take extra risk on, in an attempt to "beat the odds." But the Hedge Fund Managers aren’t in that kind of Casino. They’re gambling in a place where the odds are unknown, making up their own games.

^{Citadel made another large bet that the gap between corporate bonds and insurance bought on those bonds, known as credit-default swaps, would narrow. In essence, Mr. Griffin was betting that the economy would strengthen and that the price of insurance on debt would cheapen.}

^{Citadel, in fact, is different from many hedge funds that specialize only in trading. Mr. Griffin reinvested profits over the years into new service-based businesses. The management company, which is controlled solely by Mr. Griffin, also owns a firm that provides administrative services to other hedge funds, as well as the Citadel Derivatives Group, a major player in the options and stock markets. And Citadel recently hired a former Merrill Lynch executive to build a capital markets business, a mainstay of investment banking…}

^{“Citadel is a diverse platform,” says Matt Andresen, who runs the Derivatives Group. “Our clients do not interact with the asset management side of the firm, and they’ve come to know us in an entirely different capacity.” Mr. Griffin has full discretion over how much money he uses to subsidize his struggling funds. Last year, Citadel shouldered some of the funds’ operating costs, which are known to be among the largest in the industry.}

^{At the same time, though, Citadel blocked investors in its two troubled hedge funds from withdrawing money at the end of last year. The company has told investors that they might be allowed to withdraw money at the end of March.}

^{Mr. Griffin explains these decisions by saying that “it was the right thing to do,” because withdrawals by some investors might have disadvantaged other investors who remained in the funds. Citadel also canceled its holiday gathering because it was not “right,” he says, to celebrate last year.}

"yank their money out"? Citadel said "No." "Good hedge funds really do know how to make money out of market inefficiencies"? Another way to say that is that Hedge Funds comb the Markets looking for ways to pull money out of the cracks, the "market inefficiencies." What Sebastian Leaves out is making money on financial "bubbles" – artificial Market surges fueled by speculators and manipulators. But when the fancy terms are stripped away, they are simply Pirates – a hole in the financial bucket. They "take" money out of the economy and give nothing back. They might as well be capturing treasure ships in the Carribean and selling their plunder on the Black Market, or become the "Wreckers" of Daphne du Maurier’s Jamaica Inn, luring ships onto the shoals with false lighthouses guided by the wealthy Squire. It’s all very romantic and exciting, and it can be tolerated in moderation – like our fascination with the swashbuckler movies. But, in the end, any such "industries" becomes too big to be fun any more and have to be brought to justice. Greed is like that, it is a "growth industry."