Shrinking Economy: Don't Hedge Your Bets on Blaming the Big Risk Takers
Posted: Thursday, April 23, 2009
by Jeff Brown
Inner Projection
Most look at hedge fund managers as speculators who left their wife and children back east to strike gold in "them thar hills." They see the increased ranks of the leveraging-short-selling-derivative playing cowboys running roughshod over billions of dollars with little regard for the average guy. These hedgers are seen as the greater risk takers, the superstars of not only the financial set but up and down the social strata, standing out with their gaudy portfolios (close to $2 trillion at the peak), and are usually the first blamed by the general public for our economic woes. But in actuality if you are looking to place blame for the systemic collapse of the economy, look to the "respectable" or more conservative crowd: Ber Stearns, Lehman Brothers, A.I.G., Wachovia, Washington Mutual.
From 2004 to 2007, the number of hedge funds went from 7,436 to 10,096; however, after all the dust has cleared, thousands will have fallen. Already, fund managers have seen their portfolios drop by 20 to 30% this year, some by 40% in one quarter.
What's interesting about hedge funds, investments that are hedged or secured using a variety of methods, is that even though the methods chosen are seen by most as "risky," any time one invests there is risk. And arguably, the unique nature of hedge funds may even mitigate risk more so than for the smaller investor.
When things were roaring, the money was good, investors many, and the market stable and generally up. Contrary to general perception, it isn't that hedge managers are investing geniuses, but rather they were working as a team in a stable market. Often times they would meet for dinner in trendy restaurants in New York and London to encourage each other to make the same investments. They didn't even manage according to hedge fund credo. Often times too few shorted enough stock or managed risk prudently. Bottom line, their ability to make money came from having lots of it to begin with, working in cahoots with each other, running money overseas where regulation is weaker, and inherent permission by the S.E.C to undertake a wider range of investments than other investment funds. In other words, money talks.
But just the nature of the beast aggravates the general populace, one of the reasons for the general disdain of hedge fund managers. Another sore point for the average Joe and Jane is that hedge funds are open only to the rich, thus this exempts hedge funds from regulations governing short selling, derivative contracts, leverage, fee structures and the liquidity of interests in the fund. Meaning, once again, money talks.
You may have seen some of these managers on TV talking glibly of short-selling, a situation in which stock is borrowed by or lent to the manager and money is only made if the value of the stock falls. Here you would have seen the manager smiling explaining to the interviewer that the failure of a company was good for his clients. Not a pretty picture for the average Joe or Jane busting hump to make a living while rich hedge fund managers play with their livelihood.
If you've ever seen the movie Wall Street, staring Michael Douglas, you have the image the majority of hedge fund haters have of rich guys playing with the livelihood of the hardworking general public. And even though hedge fund managers may not trade on illegal insider information like Gordon Gekko, they still are seen as unsavory. But hedge fund managers to a great degree have been given all the help they needed legally and by being generaly left unmonitored, but now that leeway will be considerably restricted as the economy works to get back up on its feet.
Even though you can't blame hedge fund managers for the credit crisis, we still need to look closely at the general mindset of Wall Street and its regulation to prevent Main Street from going down so hard again. The case of the hedge fund manager riding roughshod over billions with little restriction is more a symptom of a sick economy than the main cause. The economy's returned health requires a systemic exam, including the S.E.C, Wall Street, the government, even the general mindset of Joe and Jane citizen. May we all invest well in our collective futures.
What's interesting about hedge funds, investments that are hedged or secured using a variety of methods, is that even though the methods chosen are seen by most as "risky," any time one invests there is risk. And arguably, the unique nature of hedge funds may even mitigate risk more so than for the smaller investor.
When things were roaring, the money was good, investors many, and the market stable and generally up. Contrary to general perception, it isn't that hedge managers are investing geniuses, but rather they were working as a team in a stable market. Often times they would meet for dinner in trendy restaurants in New York and London to encourage each other to make the same investments. They didn't even manage according to hedge fund credo. Often times too few shorted enough stock or managed risk prudently. Bottom line, their ability to make money came from having lots of it to begin with, working in cahoots with each other, running money overseas where regulation is weaker, and inherent permission by the S.E.C to undertake a wider range of investments than other investment funds. In other words, money talks.
But just the nature of the beast aggravates the general populace, one of the reasons for the general disdain of hedge fund managers. Another sore point for the average Joe and Jane is that hedge funds are open only to the rich, thus this exempts hedge funds from regulations governing short selling, derivative contracts, leverage, fee structures and the liquidity of interests in the fund. Meaning, once again, money talks.
You may have seen some of these managers on TV talking glibly of short-selling, a situation in which stock is borrowed by or lent to the manager and money is only made if the value of the stock falls. Here you would have seen the manager smiling explaining to the interviewer that the failure of a company was good for his clients. Not a pretty picture for the average Joe or Jane busting hump to make a living while rich hedge fund managers play with their livelihood.
If you've ever seen the movie Wall Street, staring Michael Douglas, you have the image the majority of hedge fund haters have of rich guys playing with the livelihood of the hardworking general public. And even though hedge fund managers may not trade on illegal insider information like Gordon Gekko, they still are seen as unsavory. But hedge fund managers to a great degree have been given all the help they needed legally and by being generaly left unmonitored, but now that leeway will be considerably restricted as the economy works to get back up on its feet.
Even though you can't blame hedge fund managers for the credit crisis, we still need to look closely at the general mindset of Wall Street and its regulation to prevent Main Street from going down so hard again. The case of the hedge fund manager riding roughshod over billions with little restriction is more a symptom of a sick economy than the main cause. The economy's returned health requires a systemic exam, including the S.E.C, Wall Street, the government, even the general mindset of Joe and Jane citizen. May we all invest well in our collective futures.
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Top-level comments on this article: (3 total)Great informative article. I heard that in the early 70's late 60's that there were 5 people that pretty much controlled the market. I feel pretty certain that was right for the time, not positive though.I agree that there is going to be a whole lot of adjustments from every one.Thanks for sharing.Well, that's mostly true. Only a few do control a great portion of the GDP. What they specifically do with it not sure. But I'm sure it's not always on the up and up. Thanks for commenting. Have a great weekend.
Wow Jeff, what a wealth of information this article, and I did see the movie Wall Street With Michael Douglas, great movie I might add, but getting back to your article, the company I work for, has a 401K that is handled by Wachovia, I invest a good portion of my salary to this 401k, as I am already retired from IBM, so I can afford to dump more money into this 401K account, I dump in about 12%, my company only contributes up to 3% on a 6% investment, 3% is all they will match. Should I be concerned about Wachovia handleing these funds? Just a question that I wanted to put out there, or are there other avenues that I should take? I know I should probably consult with a consultant, but who to trust now a days?? Great article, and very informative...talk about your fingers on the pulse of things, wow, I am truly impressed.....Your fan, and friend......GaryGary,Good questions. I also have an account at Wachovia and am a bit too busy getting my business launch going to do much with it now. But I know there are relatively solvent companies out there like Wells Fargo but lots of money being moved around right now. With things so unstable I'm waiting until the dust clears before I make a move. However, even though Wachovia was in trouble for some time and with Citibank and Wells Fargo fighting for takeover, Wells Fargo, the more stable company (no government involvement needed) won out. This deal has created the largest bank branch network in the US. Not that size is the end all and cure all, but Wells Fargo, the bottom line, is a pretty stable company, proven by the point that the gov. didin't have to step in with the takeover. Citibank of Citigroup that's another issue. I have a checking account there but I only keep enough in it each month to pay the bills. We have our saving elsewhere. But Wells Fargo is doing well at this time, so your money is relatively safe.
But hey, I'm not financial expert. Best to keep your eye on the news. I keep up to date with what's going on with my money through Money and Fortune magazines. They have a lot of good info. I teach my clients that it's more important than ever with these unstable, global economic times to keep a finger on the pulse of what's happening out there. Don't get caught blind or rely on "financial experts." Actually, the ones who tell you to invest in a 401k or 403b often times have their own agendas and benefit by getting your money. Not that what they suggest is the move. They certainly have a biased perspective.
Best to keep your nose in what's happening out there on the financial market. Read a few of the best financial magazines and go for unbiased or uninvolved opinions. When I began teaching an investor who worked for the college I worked for me told me the 403b he was going to put me into was the best move I could make. Then years later I got an independent investor consultant to take a look at my 403b and he told me it was crap. So best to get an independent opinion or an opinion from someone who is not going to make money off your money.
But bottom line, best to stay informed. Don't have to read a lot but read those magazines. They are like independent investors, mostly. Even they have a bias but at least they don't have their hands in your pocket like the company who has your money. Cheers!
Hope that helps.Thanks Jeff for that great input...I do need to track this stuff, I have a brother in law that lost about 1/2 mil in investments, he had a deal that he invested 35K a year for 5 years, and it was supposed to set him up for life, when that guy went to jail, I do not recall his name at this time, but you know who I'm talking about, my brother in law lost his money to that guy.....he said he will be lucky to get back pennies on the dollar.....poor guy. But thanks for the info.....and the good advice....your friend and fan......GaryI think you're talking about Bernard Madoff (or is it Madeoff?) who made off with millions. But there have been so many stories in the news of those who rip off. Best to use the Donald Trump method: only work with people you know and trust and trust in your gut instinct. I've relied on gut instinct many times. It hasn't lead me wrong once. One time I didn't listen and I went with my head that told me 36 to 6, pros to cons, to work for this high end, high tech start up. Ended up me and four other people took him to court for non-payment. I never listened to my head again. Gut knows all and tells all. Have a great week.
There is always risk with the stock market, yet people often forget that. When things are rosy and everyone is making money, no one complains. It's when things turn for the worse when people raise that finger of blame. The parallel to Washington and the way politicians are treated is similar: things are fine, no one complains.Hedge fund managers, and their bosses, do nothing out of the ordinary (most of them, that is) and yet because of the meltdown they, and many on Wall Street, pay the price. Just as with those exhorbitant bonuses: not one peep when things were fine, right?The problem seems to be, as with Washington, there are only a couple of players that make all of the difference and, in a way, make (and change) the rules. And, as with Washington, that can't be good, can it?This was a very informative article. Thanks.Mike,
What you say is true. And as I was reading, I was also thinking of managers in sports. If a team wins that manager has amazing skills and ability, but if he loses . . . I've often wondered how big time a manager Phil Jackson would be without the fortune of managing the Lakers and Bulls at the right time. There's the key word: "timing." Thanks for dropping by to read and comment.
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