Posted on 04/12/2004 3:36:20 AM PDT by shrinkermd
In a future remake of "The Graduate," the phrase replacing "plastics" to be whispered in the ear of the title role is "hedge funds."
That's where the action is. The number of such unregulated collections of capital has doubled in the last five years to 8,000. Managers make 20 percent of any profits, and if they bet wrong, simply close up the fund, distribute what's left and start a new one; the liquidation rate is about one-fourth every year.
That's why so many of the hottest Wall Streeters are joining the stampede into managing these high-end mutual funds. Because hedge fund investors are limited to millionaires and other heavily endowed entities, managers are free to leverage with bank loans and speculate secretly, untroubled by regulation by the Securities and Exchange Commission.
You ask: Who cares if richies lose their stuffed shirts? George Soros, whose hedge fund "broke the pound" a dozen years ago, made a billion or so by betting dangerously on currency fluctuation (some of which he's now using to try to break the Bush administration). Why should the average investor worry about protecting the likes of him?
The S.E.C. chairman, Bill Donaldson — innovative investment banker, lifelong Republican — told the Senate Banking Committee last week that "hedge funds are being purchased by intermediaries on behalf of millions of . . . retirees, pensioners and others . . . through their pension plans or funds of hedge funds." He is seeking a rule that would make it possible for the S.E.C. to "prevent, detect and deter abusive, fraudulent conduct" in hedge funds.
As if to make Donaldson's point, the Massachusetts state pension board voted the day before to invest $1.6 billion in hedge funds. That's money promised to the elderly non-rich. Massachusetts voters may be liberal swingers, and $1.6 billion may be mere chump change in a hedge fund industry with assets now mushrooming to nearly a trillion dollars. But it defies reason to claim that "little people" are unaffected by the manipulations of the two-thirds of hedgehogs who choose not to register with the S.E.C.
A Massachusetts investment adviser says "this helps you in down markets." That's largely true; a hedge fund often bets that a market, or the value of some arcane financial derivative, will go down, thereby profiting in recessions and countering a drop in its investor's portfolio. And some universities and foundations hire sophisticated watchdogs to monitor hedge fund performance, reducing the risk that flows from spreading their risk.
What's more, many economic theorists on Alan Greenspan's Federal Reserve staff approve of hedge funds and their favored financial derivatives. Helps liquidity, manages risk, encourages efficiency and the flow of global trade.
Fine; how, then, would those good things be harmed by the requirement of disclosure to prevent market manipulation, "front running" and insider dealing? S.E.C. registration might well have prevented the debacle in 1998 of Long-Term Capital Management, which creditors had to cover to the tune of $3.5 billion lest it disrupt the financial system. Same with the current tweet-tweeting of Canary Capital, which seems to have had Bank of America in its cage.
Just as some market insiders have an interest in pushing certain stock prices up, some hedgehogs have an interest in spreading rumors that depress stocks, currencies, or commodity prices. Would it hurt globalization for the world public to know who is buying or selling what — after saying the opposite? Full disclosure would increase investor confidence in the U.S., setting a free-market example to exchanges around the world.
I feel a certain responsibility for again banging my spoon against this hedge fund highchair because I wrote the 1971 Nixon speech suspending the convertibility of the dollar into gold. That necessary flotation, in which Fed Chairman Arthur Burns acquiesced, had an unintended consequence: it launched the frantic derivative dealing that inflated today's hedge fund bubble. (Who knew? Soros owes me big time.)
At a time when the media is transfixed with blame-gaming, can we not spare a moment to connect the dots of a potential market crisis? Isn't this the time to shake the trees of Wall Street and Pennsylvania Avenue, to protect unwary pensioners and ultimate smaller investors?
America is running a real financial risk. We should fund and empower the S.E.C. to hedge against it.
Not.
If they're worried about Aunt Martha's pension fund, just prohibit pension funds from investing in hedge funds.
Hooray! An island of Liberty in the storm of statiism -- geo-fascism, nanny-state, and beltway-state. Keep it free!
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