The Hedge Fund Hegemon

There are anecdotes about individual hedge fund managers moving to Geneva.

The US, the world s banker, had mutated into the world s hedge fund.

Moreover, hedge fund managers can easily fake high performance without getting caught.

If you are a high net worth investor, or a sovereign wealth fund, it makes perfect sense to hold a small percentage of your assets in gold as a hedge against extreme events.

And so you can imagine, here I was an analyst at a hedge fund.

Auernheimer has said that he is planning to open a hedge fund, TRO LLC.

This gives them a capital base similar to the combined assets of all the world s major hedge funds.

Both the private equity and hedge fund industries reacted by publishing voluntary codes of conduct.

The insider trading trial of Raj Rajaratnam, a billionaire hedge fund manager, has now begun.

Deleveraging by highly leveraged firms such as hedge funds will lead them to sell illiquid assets in illiquid markets.

STATEMENT OF ASSETS, LIABILITIES, RESERVES AND FUND BALANCES

There is little excuse for Iceland, which essentially turned itself into a highly leveraged hedge fund.

a statement of assets, liabilities, reserves and fund balances

The bottom line is that hedge fund managers put their investors at risk, yet assume little risk themselves.

And hedge funds, unlike banks, can leverage their bets, borrowing to take on assets many times the size of their capital base.

The Obama administration is promising to pick up losses to persuade hedge funds and other private investors to buy out banks bad assets.

First, it is one of the few insider trading cases ever to be brought against a professional hedge fund manager.

So pressure outside the US and Britain to put the hedge fund industry on a tighter regulatory leash is hardly surprising.

It is harder to grow when construction workers and hedge fund managers have to be retrained to work as welders and nurses.

In a separate move, Brown promised to close any legal loopholes that enable hedge fund managers to exempt themselves from paying taxes.

Enter shareholder activist David Einhorn, whose hedge fund Greenlight Capital has been pressing Apple to distribute a healthy fraction of that cash.

Paul Marshall, a hedge fund chairman, told the Financial Times that he hoped voluntary action by the industry will take the pressure off.

Nevertheless, it will be difficult for legitimate hedge fund managers to remove the taint that rogue traders have now spread over their industry.

In the late 1990 s, the US hedge fund Long Term Capital Management convinced the world that its partners were masters of the universe.

An Eddie in Los Angeles sent me an email asking if I wanted to serve on the advisory board to his new hedge fund.

And the US has been concerned about providing for national treatment in European rules governing derivatives, as well as rules regarding hedge fund managers.

Indeed, I personally know a successful US hedge fund manager who is quite conservative and consistently votes Republican, but who is thinking of supporting Obama.

But other real assets can provide a similar hedge, and those tail risks while not eliminated are certainly lower today than at the peak of the global financial crisis.

Foreign oil assets are a bad hedge in such cases, for they subtract from citizens income when it is already low and add to it when it is high.

Even we economists who believe that global financial innovation yields huge net benefits must admit that today s hedge fund boom is becoming like the tech bubble.

The credit freeze is partly the work of bankers and hedge fund managers who acted just like Nadya Suleman, leveraging the present for an unrealizable future.

Assets, liabilities and reserves and fund balances as of 31 December 2004, with comparative figures for 2003

Table 2. Combined statement of assets, liabilities, and reserves and fund balances as at 31 December 2004

The City of London, lower Manhattan, and a few other centers became money machines that made investment bankers, hedge fund managers, and private equity folk immoderately wealthy.

Enter Oz, who holds a doctorate in physics. He has no investment talent, but he knows about probabilities, and is running a hedge fund worth 100 million.

Rather, gold is a hedge.

Is Gold a Good Hedge?

But a recent New York court ruling against Argentina in a case brought by a holdout hedge fund creditor has dramatically raised the stakes of sovereign default and bankruptcy.

While there are certainly some rotten apples in the hedge fund industry, the majority of traders behave properly, and their legitimate research contributes to making the market more efficient.

Even if owning oil assets is a useful hedge (as in a small, oil consuming country), it is not clear that buying stakes in opaque companies in foreign countries is the best strategy.

Goldman Sachs, for example, has made a point of publicly buying endangered assets in its Global Equities Opportunity Fund.

The Board reports to the General Assembly on the operations of the Fund and on the investment of its assets.

While such investment in long term productive assets like infrastructure is essential to generating the income that these investors demand, less than 1 of pension fund assets are allocated directly to infrastructure projects.

So gold is a poor inflation hedge.