{"id":2715,"date":"2008-12-18T10:42:37","date_gmt":"2008-12-18T15:42:37","guid":{"rendered":"http:\/\/1boringoldman.com\/?p=2715"},"modified":"2008-12-19T01:54:44","modified_gmt":"2008-12-19T06:54:44","slug":"making-money","status":"publish","type":"post","link":"https:\/\/1boringoldman.com\/index.php\/2008\/12\/18\/making-money\/","title":{"rendered":"“making” money…"},"content":{"rendered":"
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End of the Hedge Fund?<\/strong><\/a>
By Sebastian Mallaby
December 18, 2008<\/div>\n

For sheer toe-curling embarrassment, it may be a while before Wall Street does better than the Bernard Madoff scandal. Here was a rogue who practically telegraphed his unreliability by hiring a tiny, no-name audit firm, by reporting monthly investment results that never fluctuated and by claiming a trading strategy that could not possibly have been implemented given the billions of dollars he managed. And yet, despite these warnings, the rich, the famous and the supposedly sophisticated entrusted their money to Madoff, who defrauded them with the most laughably crude of methods – an old-fashioned Ponzi scam. <\/p>\n

The question this prompts is not really about regulation, though some argue otherwise. Even if you define Madoff’s investment outfit as a hedge fund, which for various reasons is debatable, there’s nothing in this saga that supports clamping down on the industry… <\/p>\n

Because it is possible to commit undetected fraud, the industry will attract fraudsters; eventually, investors will realize that they can’t tell the good guys from the bad and yank their money out.<\/strong> If this is going to happen, the Madoff scandal could be the catalyst, especially because it has hit at a time when hedge funds are in trouble for other reasons. Hedge fund strategies depend on borrowing, or "leverage," which is hard to come by now. They often depend on "shorting" stocks – that is, betting that they’ll fall in value – but regulators have restricted that practice. Even before the Madoff scandal, there were estimates that hedge fund assets might shrink from just under $2 trillion a few months ago to perhaps $1.4 trillion. <\/p>\n

But it would be wrong to count the hedge funds out. Perhaps half of all funds use strategies about which there is no great secret, so disclosure is possible: The Foster-Young argument does not cut so sharply here. The other half can find ways to signal their honesty without disclosing their tactics: The most obvious is for managers to keep a serious amount of their own money in their funds. Good hedge funds really do know how to make money out of market inefficiencies.<\/strong> After the past 18 months of mayhem, it should be painfully obvious that there is plenty of inefficiency around. <\/div>\n<\/blockquote>\n
Sebastian Mallaby<\/strong><\/a> is a Washington Post editorialist, a guru at any number of Think Tanks, and writes for several prestigious journals. He’s currently writing a book about Hedge Funds. This editorial is in today’s Washington Post. It’s a defense of Hedge Funds that ends with, "Good hedge funds really do know how to make money out of market inefficiencies.<\/strong> After the past 18 months of mayhem, it should be painfully obvious that there is plenty of inefficiency around.<\/strong><\/font>" His logic is that the Bernard Madoff Scandal shouldn’t put us off of Hedge Funds because Bernard Madoff [maybe] wasn’t really a Hedge Fund [though if you look at my last post, whistle blower Harry Markopolos entitled his ignored letter about Madoff to the S.E.C. "The World’s Largest Hedge Fund is a Fraud<\/font><\/strong><\/a>"]. And his defense of Hedge Funds is that the managers of "Good Hedge Funds" really do know how to make money out of "market inefficiencies." Here’s what Mallaby had to say this time last year: <\/div>\n
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Hands Off Hedge Funds<\/a><\/strong>
Sebastian Mallaby
From Foreign Affairs<\/em><\/strong>
January\/February 2007<\/div>\n
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Summary:<\/strong>  The massive growth of hedge funds has sparked warnings of instability and demands that the industry be regulated. But the fear of hedge funds is overblown, based on a misunderstanding of their role in the international financial system. In reality, hedge funds do not increase risk; they manage it — and policymakers, rather than clamping down, should make sure hedge funds have the tools to perform this function well…<\/p>\n

In the end, the critics of hedge funds would do well to remember why this sector has emerged as such a force. Until the late 1960s, the financial world was quaintly stable: exchange rates were inflexible, interest rates were regulated, and the whole system was anchored by a fixed gold price. But that world collapsed when inflation drove the dollar off the gold standard and currencies and interest rates began to float; from then on, it became impossible to amass savings without facing financial uncertainty. Tools for coping with that uncertainty — deep markets in futures, options, and other derivative instruments — sprang up in response to the newly volatile environment. And hedge funds emerged as the masters of these tools, providing quasi insurance to investors and firms and introducing a healthy dose of contrariness into financial markets. For this, they are accused of generating risk. But their real systemic function is to manage it – and it is their very success in doing so that has generated both their profits and their phenomenal growth.<\/div>\n<\/blockquote>\n
Sebastian is consistent. He thinks Hedge Funds are a really good idea. He explains, "it became impossible to amass savings without facing financial uncertainty. Tools for coping with that uncertainty — deep markets in futures, options, and other derivative instruments — sprang up in response to the newly volatile environment.<\/strong>" I personally think he’s got it backwards. But first, "What the hell is a Hedge Fund?<\/strong><\/font>"<\/div>\n
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Hedge fund<\/strong><\/a>
From Wikipedia<\/strong><\/div>\n

A hedge fund<\/strong> is a private investment fund<\/span> open to a limited range of investors that is permitted by regulators to undertake a wider range of activities than other investment funds and also pays a performance fee to its investment manager<\/strong><\/font>. Each fund will have its own strategy which determines the type of investments and the methods of investment it undertakes. Hedge funds as a class invest in a broad range of investments extending over shares, debt, commodities and beyond.<\/p>\n

As the name implies, hedge funds often seek to offset potential losses in the principal markets they invest in by hedging their investments using a variety of methods, most notably short selling. However, the term "hedge fund" has come to be applied to many funds that do not actually hedge their investments, and in particular to funds using short selling and other "hedging" methods to increase rather than reduce risk, with the expectation of increasing return.<\/p>\n

Hedge funds are typically open only to a limited range of professional or wealthy investors. This provides them with an exemption in many jurisdictions from regulations governing short selling, derivative contracts, leverage, fee structures and the liquidity<\/span> of interests in the fund. A hedge fund will typically commit itself to a particular investment strategy, investment types and leverage levels via statements in its offering documentation, thereby giving investors some indication of the nature of the fund.<\/p>\n

The net asset value of a hedge fund can run into many billions of dollars, and this will usually be multiplied by leverage. Hedge funds dominate certain specialty markets such as trading within derivatives with high-yield ratings and distressed debt.<\/div>\n<\/blockquote>\n

I call "Bottom Feeders"<\/em> on Hedge Funds!<\/strong><\/font> <\/h1>\n
One rarely gets to read such malarkey directly.<\/div>\n