Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

What are hedge funds, and what social functions do they serve?

danwang.co

Post reply on HN
Print view View original

21–30 of 122 posts

Re: What are hedge funds, and what social functions do they serve?

#21

Post by kohanz »

...their trades are supposed to bully mis-priced assets into more reasonable valuations. That way, undervalued securities pick up in price, and overpriced securities are shorted down before they form a bubble. Though hedge funds failed to prevent the last two bubbles, it was not for lack of trying: Hedge funds bet against many tech companies, and many were on the right side of the housing bubble, i.e. holding CDS on the CDOs.

So, in essence, hedge funds either failed or are incapable of actually fulfilling one of their main social functions (to avoid "bubbles" by helping to achieve more "reasonable valuations"), but "hey, some of us tried!".

Re: What are hedge funds, and what social functions do they serve?

#22

Post by vasilipupkin »

Sniperfish wrote: post #8
basseq wrote: post #2

Notes and errata: Simple answer to the question posed in paragraph two ("How did a few asset managers earn more money in a single year than Pierpont Morgan did in his whole life?"): inflation. ($1.5B in 1913 is about $36B today.) Threshold for becoming an accredited investor is $200k annual income or $1M net worth. Particularly interesting is the overlap between hedge funds and VC investors / angels, considering the…

Speculation only, but I'd expect the relative size and scope of the financial industry today vs 1913 to explain that difference. As in it's easier to earn $1.5bn within 2013's financial industry than it would have been (inflation adjusted) in 1913.

Note that in 1913 U.S. economy as a whole was probably 20 times smaller, even after adjusting for inflation. So, JP Morgan had a relatively big chunk of money as a percentage of real gdp

Re: What are hedge funds, and what social functions do they serve?

#23

Post by [deleted] »

Sniperfish wrote: post #8
basseq wrote: post #2

Notes and errata: Simple answer to the question posed in paragraph two ("How did a few asset managers earn more money in a single year than Pierpont Morgan did in his whole life?"): inflation. ($1.5B in 1913 is about $36B today.) Threshold for becoming an accredited investor is $200k annual income or $1M net worth. Particularly interesting is the overlap between hedge funds and VC investors / angels, considering the…

Speculation only, but I'd expect the relative size and scope of the financial industry today vs 1913 to explain that difference. As in it's easier to earn $1.5bn within 2013's financial industry than it would have been (inflation adjusted) in 1913.

[deleted]

Re: What are hedge funds, and what social functions do they serve?

#24

Post by aetherson »

Sniperfish wrote: post #8
basseq wrote: post #2

Notes and errata: Simple answer to the question posed in paragraph two ("How did a few asset managers earn more money in a single year than Pierpont Morgan did in his whole life?"): inflation. ($1.5B in 1913 is about $36B today.) Threshold for becoming an accredited investor is $200k annual income or $1M net worth. Particularly interesting is the overlap between hedge funds and VC investors / angels, considering the…

Speculation only, but I'd expect the relative size and scope of the financial industry today vs 1913 to explain that difference. As in it's easier to earn $1.5bn within 2013's financial industry than it would have been (inflation adjusted) in 1913.

Yeah, this is more or less right. Inflation adjustments measure how much you have to spend to consume a given amount -- so, basically, if a loaf of bread costs $0.02 in 1913 and $2.00 in 2014, then inflation is 100x. With lots of complexity in there as well, of course.

Notably, what inflation isn't is something like "percentage of total size of the economy." So if the economy expands (as it has), then the amount of money available to be made in something that scales to the size of the economy (like the financial markets) increases well beyond the pace of inflation.

In 1913, the US population was about 1/3rd what it is now. The US now plays a much more significant role in the world economy, and of course technological advancement has increased the size of the economy as well. Inflation doesn't account for any of that per se.

Re: What are hedge funds, and what social functions do they serve?

#26

Post by kohanz »

epx wrote: post #16

Not everything needs to have a social function.

Exactly. Their function is creating market-beating returns for their investors. Nothing else.

There was a great interview with Josh Reich from Simple on Mixergy recently [0]. Before Simple, he worked at a hedge fund but didn't find the work to be fulfilling because he didn't feel that he was solving a problem for anyone, or making people's lives better (he had studied to be a doctor prior to that as well). He summed it up by jokingly saying "I've never had someone come up to me on the street, saying 'I need liquidity!!'".

[0] http://mixergy.com/interviews/joshua-reich-simple-interview/

edit: wow, there is some hedge-fund sympathizer down-voting every post that doesn't buy into this "social function" premise.

Re: What are hedge funds, and what social functions do they serve?

#29

Post by auntienomen »

spuiszis wrote: post #19
scrumper wrote: post #9

Good article. For lay readers, perhaps you might include a definition of your usage of 'asset manager' (where you reference Blackrock). It's confusing if you don't know the terminology: a hedge fund manages assets sometimes on behalf of institutions, but it's not an institutional asset manager.

Good point. Although, I'd argue that more often than not, institutions (pension funds, funds of funds, etc.) are the ones investing in hedge funds rather than individuals. Usually there is a pretty high minimum investment (and needing to know the right people) that you won't be able to meet, unless you are a very high net worth individual. For example (ps this was a pretty big deal last week), CALPERs the largest U.S…

1% not 10%. CALPERS only allocated about $4B out of $300B to hedge funds.

Re: What are hedge funds, and what social functions do they serve?

#30

Post by 1123581321 »

danwyd wrote: post #4

Fairy long article. Here's the summary: Hedge funds are investment vehicles that have avoided being heavily-regulated because they only accept money from government-certified "accredited investors." Their investment strategies are secret and unconventional. Some of them deliver floods, while the average one doesn't do that well. Hedge funds provide liquidity, which makes it easier to trade; and conduct arbitrage, so…

Long-Term Capital Management's bailout was organized by the Fed even though it didn't actually take on the assets. If the private bailout hadn't been agreed to, then the Fed would have directly intervened.

I say this to correct the record, not to detract from your point about risk management, which is true.

Post reply on HN