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

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

#91

Post by m52go »

Daishiman wrote: post #88
lmm wrote: post #75

Earlier quoted context omitted.

> 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. If it's useless then why does…

> If it's useless then why does it make them money? Is that really a line of reasoning? I can make money by drug and arms trafficking, helping other skirt the law, take advantage of legal loopholes, using violence where competitors cannot to strongarm others into submission, exploiting labor, etc. If a hedge fund makes its money just by being faster in transactions in a way that gives no real benefit to actual creato…

Hedge funds are opportunistic pools of capital. Like venture capital firms, they exist primarily to make a buck, only hedge funds play primarily in the financial markets.

Real estate firms exist to make money using real estate. Banks exist to make money using loans.

Finance exists to make money. By design, it doesn't care about real value.

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

#92

Post by lifeisstillgood »

dageshi wrote: post #72
lifeisstillgood wrote: post #41

Earlier quoted context omitted.

And it is not whether an organsiation is a bank or a hedge fund that determines if it is bailed out - it is the expected social cost of it's collapse that determines it - hence LTCM was bailed out, because the smart money thought it would take us all with it and why Lehmens was not (mistakenly?)

I think the issue at the time was that none of the big banks/financial entities trusted each other anymore. Everything was grinding to a halt and one by one companies were collapsing and having to be bailed out by the US government. I think a point was reached where it was decided to let Lehman fail, stress test the system in order to see who was really solvent and who wasn't and then prop it backup and reinflate it.

Oh I got the impression it was more a philosophical idea "moral hazard" was allowed to proceed, then it scared everyone. I seem to recall the Governor of the. Bank of England saying Lehman was an example of avoiding the moral hazard of bailouts then 24 hours later bailing out started.

There is a good podcast on LSE / iTunes with Adair Turner and Buttonwood Writer from The Economist who are the fire I have heard to beyond "Banks and fraud and regulation" and into "Global savings, infinite credit" and suggest things like 100% reserve banking (ie no credit if not created by central banks)

It's worth listening too even if it's rather uneven.

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

#93

Post by damoncali »

pjc50 wrote: post #86
damoncali wrote: post #53

Earlier quoted context omitted.

If it's advantageous to have more debt, then this is what you do. It's done by pretty much every company in the world, not just hedge funds. It's literally finance 101.

Advantageous for whom, though? http://www.theguardian.com/money/2014/sep/22/phones-4u-closu... My understanding is that phones4u was paying out dividends while increasing its debt; effectively an equity-for-debt swap. The difference is that this transfers risk from the owners to the creditors, allowing the business to collapse after it's been looted. I think there's a case to be made for a rule "always pay your credi…

That's how it's supposed to work. A company makes money and gives it to the shareholders. When lenders lend money to the company, they are getting a return for their risk. Companies adjust their capitalization all the time - it's a normal part of running a business. You can do it with dividends or share repurchases, and if it makes sense, you can fund either with debt. There is nothing nefarious about doing that.

Further, if you always pay your creditors first, there is no point in capitalizing with debt - you give up significant value by doing so. It is normal and healthy for some companies to finance themselves perpetually with debt.

Edit: Ok, so there are still some non-believers. Think of it this way. You own a profitable company with no debt. Your accountant tells you that you'll increase the company's value if you are 50% debt and 50% equity. This is a consequence of our tax code. Sounds like a good plan. Now what? The company already pays dividends and has as much cash as it needs for operations. You borrow money (which banks are happy to give you because you can more than afford the debt service), and pay out the proceeds as dividends. You are now have all that money in your pocket, and your company is basically worth the same amount (value = equity, which is now 1/2 what it was + debt) - a little more, actually, because of the tax consequences of the debt.

This is totally normal. Sometimes the optimal debt level is zero. Sometimes it's 90%. If companies are pulling huge amounts of cash out as a result of debt financing, it's only because they had a sub-optimal capitalization to begin with. Again - nothing nefarious here. It's all just a way of adjusting risk and optimizing returns to the shareholders.

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

#94

Post by [deleted] »

pjc50 wrote: post #86
damoncali wrote: post #53

Earlier quoted context omitted.

If it's advantageous to have more debt, then this is what you do. It's done by pretty much every company in the world, not just hedge funds. It's literally finance 101.

Advantageous for whom, though? http://www.theguardian.com/money/2014/sep/22/phones-4u-closu... My understanding is that phones4u was paying out dividends while increasing its debt; effectively an equity-for-debt swap. The difference is that this transfers risk from the owners to the creditors, allowing the business to collapse after it's been looted. I think there's a case to be made for a rule "always pay your credi…

[deleted]

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

#95

Post by basseq »

scrumper wrote: post #7
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…

The author says that J. P. Morgan's estate was worth $1.5bn in 2014 dollars, not in 1913 dollars.

Apologies: I stand corrected.

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

#96

Post by prostoalex »

goodside wrote: post #85

This really damages the credibility of the article: "These investors must prove a certain net worth and go through a restrictive application process to become accredited." In fact, there is no application process whatsoever. No organization "accredits" an accredited investor, and the SEC doesn't keep a list of who is and who isn't. If you satisfy the SEC definition, you simply are one: http://www.sec.gov/answers/accr…

The requirement protects their liability if later on you decide to sue them for losses.

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

#97

Post by [deleted] »

m52go wrote: post #91
Daishiman wrote: post #88

Earlier quoted context omitted.

> If it's useless then why does it make them money? Is that really a line of reasoning? I can make money by drug and arms trafficking, helping other skirt the law, take advantage of legal loopholes, using violence where competitors cannot to strongarm others into submission, exploiting labor, etc. If a hedge fund makes its money just by being faster in transactions in a way that gives no real benefit to actual creato…

Hedge funds are opportunistic pools of capital. Like venture capital firms, they exist primarily to make a buck, only hedge funds play primarily in the financial markets. Real estate firms exist to make money using real estate. Banks exist to make money using loans. Finance exists to make money. By design, it doesn't care about real value.

[deleted]

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

#98

Post by damoncali »

Daishiman wrote: post #88
lmm wrote: post #75

Earlier quoted context omitted.

> 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. If it's useless then why does…

> If it's useless then why does it make them money? Is that really a line of reasoning? I can make money by drug and arms trafficking, helping other skirt the law, take advantage of legal loopholes, using violence where competitors cannot to strongarm others into submission, exploiting labor, etc. If a hedge fund makes its money just by being faster in transactions in a way that gives no real benefit to actual creato…

It's not the hedge funds that are paying dividends/repurchasing shares - it's the companies they invest in. The companies create value and pass the profits on to their investors. This has nothing to do with trading.

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

#99

Post by dageshi »

lifeisstillgood wrote: post #92
dageshi wrote: post #72

Earlier quoted context omitted.

I think the issue at the time was that none of the big banks/financial entities trusted each other anymore. Everything was grinding to a halt and one by one companies were collapsing and having to be bailed out by the US government. I think a point was reached where it was decided to let Lehman fail, stress test the system in order to see who was really solvent and who wasn't and then prop it backup and reinflate it.

Oh I got the impression it was more a philosophical idea "moral hazard" was allowed to proceed, then it scared everyone. I seem to recall the Governor of the. Bank of England saying Lehman was an example of avoiding the moral hazard of bailouts then 24 hours later bailing out started. There is a good podcast on LSE / iTunes with Adair Turner and Buttonwood Writer from The Economist who are the fire I have heard to be…

Oh there was an element of that in there as well. But bear in mind before Lehman they'd bailed out AIG I believe to the tune of 200billion USD? I think to keep effectively writing blank cheques to cover Wall Street's fuckups was becoming increasingly untenable. I think they were faced with three choices, keep bailing out publicly which was politically untenable, bailout on the quiet which would likely have ended up with Japanese style Zombie corporations or let Lehman fail and get the worst over with.

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

#100

Post by pbhjpbhj »

rbcgerard wrote: post #83
epx wrote: post #16

Not everything needs to have a social function.

I wonder if the people talking about "social function" have applied this standard to candy crush and angry birds?

Surely those app/games have an obvious social function, entertainment. That is the vehicle through which these Skinner-box like tools are accepted enabling them in a minority of cases to extract relatively large amounts of cash via, eg, IAP.

I, like millions upon millions of others, played both and found them entertaining. They don't appear to return value commensurate with their incomes and have certain strong negative influences on a limited number of players.

The function of hedge funds is to extract worth from the financial markets by riding natural, or forced, fluctuations in the price of securities and other instruments.

It's financial trickery that enables extraction of value without valuable input. There's always some arm-wavey stuff about how they add valuable liquidity but TBH that always seems bogus to the extent that the liquidity gained isn't worth anywhere near the value extracted. As they're meta-trades they may have a damping effect but it seems if an acceleration can be achieved, using lots of leverage, then more gains are created. Encouraging market instability appears to be the way to create greater opportunities for profit - but I'm a layman, perhaps I'm seeing it wrong?

As far as social function it seems that is to hedge the investments of the rich [which term I recognise is subjective] with returns which don't necessarily fall with traditional markets.

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