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

danwang.co

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

#31

Post by [deleted] »

digikata wrote: post #15
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…

If their investment strategies are secret, then how do we know that hedge funds haven't been bailed out by governments - at least indirectly? The secrecy makes it more difficult to evaluate if public policy could have been steered by politically connected hedge funds.

[deleted]

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

#32

Post by bedhead »

Disclaimer: I am a hedge fund manager.

Here's the definition of a hedge fund: an investment firm with extremely high fees whose investment strategy probably falls outside the scope of the vast majority of accessible investment funds. Most criticisms of hedge funds are so weak that they border on straw man arguments. There are fair criticisms for sure, but mostly those complaints are centered around the fees being too high. Asking about their "social function" is a leading question and shows that the author isn't looking at this very objectively.

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

#33

Post by jackgavigan »

If you're interested in reading some more about the collapse of LTCM, I recommend When Genius Failed by Roger Lowenstein (for a fuller appreciation, read Liar's Poker by Michael Lewis first).

If you're interested in reading an excellent account of a startup HFT/hedge fund, it's worth ordering a secondhand copy of The Predictors by Thomas Bass (for a fuller appreciation, read Chaos by James Gleick first).

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

#35

Post by thingylab »

digikata wrote: post #15
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…

If their investment strategies are secret, then how do we know that hedge funds haven't been bailed out by governments - at least indirectly? The secrecy makes it more difficult to evaluate if public policy could have been steered by politically connected hedge funds.

1. There is no relationship whatsoever between the secrecy of their strategies and the likelihood of a government bailout. Most companies have some sort of proprietary secrets, after all.

2. They are no more secretive than the average private company. In fact, this is largely a myth, as is the belief that hedge funds are "lightly regulated". You can in fact find a lot of information about a fund by spending five minutes on the SEC website.

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

#36

Post by auntienomen »

vasilipupkin wrote: post #22
Sniperfish wrote: post #8

Earlier quoted context omitted.

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

Moreover, capital was far scarcer then than now. If you needed to raise money for an enterprise, there were fewer places to look for it. Consequently, Ol' Pierpont had a great deal more politial power than someone with the same amount of cash might today.

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

#37

Post by bradleyjg »

digikata wrote: post #15
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…

If their investment strategies are secret, then how do we know that hedge funds haven't been bailed out by governments - at least indirectly? The secrecy makes it more difficult to evaluate if public policy could have been steered by politically connected hedge funds.

We know they've been bailed out indirectly. Among other mechanisms: as counterparties to bailed out banks, as money market investors, and as holders of corporate and GSE debt.

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

#39

Post by lmg643 »

What social functions do hedge funds provide, indeed?

Renaissance Technologies avoided $6bn in taxes by using derivatives to pretend their ultra-high frequency trading profits were actually long-term capital gains.

http://www.bloomberg.com/news/2014-07-21/renaissance-avoided...

Renaissance is one of the biggest and most successful hedge funds of all time.

SAC was another of the most successful hedge funds of all time - government couldn't get anyone to prove insider trading directly implicating the founder, but they got enough people around him to confess that they've basically cut the fund down to a personal funds only shop - Point72.

What else ...

Plenty of socially questionable legal strategies in HF land. Big one is stock buybacks - rational responses to Federal Reserve interest policies. If debt is priced too cheaply, HF will push companies to lever up to buyback stock. This is a socially useless form of activity, which increases business risk based on capital structure theory. Short term payoff, the debt will never go away.

Returns - the Hedge Fund industry in aggregate is so far off the S&P500 over the past 5 years that perhaps it ought not to exist?

http://www.bloomberg.com/news/2014-09-17/hedge-fund-performa...

So - to deliver middling average returns, the hedge fund industry will charge 4x to 20x the cost of an index fund.

Much of the money for the funds comes from public pension funds.

We can go on...

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