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FRED
07-27-06, 09:08 PM
Sell-out: Why hedge funds will destroy the world (http://www.newstatesman.com/200607310033)
July 27, 2006 (Janet Bush - New Statesman)

If hedge funds were a country, it would be the eighth-biggest on the planet. They can sink whole economies, and have the potential to crash the entire global financial system. Yet they are beyond regulation. We should be very afraid.

Something ominous is going on in world finance - again. On 11 May, the US Federal Reserve, America's central bank, raised rates and hinted that it might do so again. Wall Street wobbled but stock markets in the emerging economies fell through the floor. Since that day, Colombia's stock market has slumped by 42 per cent; Turkey's by 38 per cent; Pakistan and Egypt by 28 per cent; India by 25 per cent; the Czech Republic by 22 per cent.

Why? These fast-developing economies have been the recent darlings of the world's mobile capital, acting as magnets for multinational corporations seeking new frontiers. Yes, the US economy is still the biggest in the world and changes in US interest rates affect the entire global financial system. But there is something very dark indeed at the heart of this story and it is called the hedge-fund industry - lords of havoc who, a consensus is building, have the potential to be responsible for the next great crash - and nobody knows what to do about it.

AntiSpin: $1.5 trillion under management of 9,000 hedge funds, a fraction of them at best run by a couple dozen geniuses, maybe a few hundred more run by truly competent and mature money runners, and few thousand run by nitwits. What could possibly go wrong? As Martin Mayer told us, the Fed is well aware of the risks but lacks the will to do anything about it.

ChessMan
07-27-06, 11:17 PM
Are hedge funds getting their money from bank credit expansion? If so, then yes the fed is to blame.

If we had a hard money system with no fractional reserve banking and some fund with $1.5 trillion in assets wanted to bid up the price of foreign stocks and then sell them causing a 42% slide, what's the big deal?

Jim Nickerson
07-28-06, 01:59 AM
As Martin Mayer told us, the Fed is well aware of the risks but lacks the will to do anything about it.

Martin Mayer? where have I heard that name? Not on iTulip.

lobodelmar
08-07-06, 03:20 PM
Yeah, has the Martin Mayer piece been posted yet? I haven't seen it on here anywhere...

metalman
08-07-06, 07:32 PM
winers. these guys always come thru.

Jim Nickerson
08-07-06, 07:40 PM
winers. these guys always come thru.

I think it is "whiners", nevertheless the intent of your comment made me chuckle and chuckle.

metalman
08-07-06, 07:53 PM
I think it is "whiners", nevertheless the intent of your comment made me chuckle and chuckle.

no one on this forum can spell worth a shit, including me. at least I can spell shit right!

EJ
08-07-06, 08:23 PM
Regret the delay in posting the interview with Martin Mayer. He was great to talk to. A lot of fun and full of highly relevant insights.

The challenge is translating the language of the conversation into iTulip English.

For example, how many iTulip.com readers understand the concept of "trading volatility"?

Many terms have to be defined along the way without slowing the pace.

Re-read this (http://www.brookings.edu/views/articles/mayer/199911.htm) for an insight into the challenge.

Thanks for your patience.

-EJ

EJ
08-07-06, 08:26 PM
no one on this forum can spell worth a shit, including me. at least I can spell shit right!

Read Mayer's piece above and you can see that he knows how spell shit, too:

"...sellers of volatility 'eat like chickens and shit like elephants'—in fact expresses a practical certainty with theoretical justification."

WDCRob
08-07-06, 10:47 PM
As one of the people for whom EJ is currently dumbing down, err, editing, the interview with Mr. Mayer I've got a question related to Mayer's Brookings article he links to.

Is the basic problem with the current Hedge Funds (also described in the Risk Pollution column) that: someone already holding valuable assets is more interested in hedging against a catastrophic loss to protect their asset while someone not currently holding valuable assets is buying volatility using a great deal of leverage in order to realize relatively small, but highly likely, gains.

And in the absence of good models the volatility is mispriced. Doubly so when volatility is historically low.

Since the highly leveraged folks are also the ones who face the possibility of a catastrophic loss and they're using faulty models, they aren't maintaining an appropriate level of reserves. Which ought to be the concern of the regulators, currently sleeping at the switch.

And there's nothing in the end to make sure the seller of volatility gets paid. Which leads to a secondary level of defaults by the seller? And eventually Worldwide Financial Armageddon. Or somesuch.

Is that the Hedge Fund problem in a nutshell, or has my go at the puzzle, allegedly of a Monet, come out looking distinctly like a Picasso?

If so, apologies. It's an odd experience, to say the least, to feel completely out of my depth. But at iTulip it seems to happen more often than not.

EJ
08-08-06, 12:18 AM
As one of the people for whom EJ is currently dumbing down, err, editing, the interview with Mr. Mayer I've got a question related to Mayer's Brookings article he links to.

Is the basic problem with the current Hedge Funds (also described in the Risk Pollution column) that: someone already holding valuable assets is more interested in hedging against a catastrophic loss to protect their asset while someone not currently holding valuable assets is buying volatility using a great deal of leverage in order to realize relatively small, but highly likely, gains.

And in the absence of good models the volatility is mispriced. Doubly so when volatility is historically low.

Since the highly leveraged folks are also the ones who face the possibility of a catastrophic loss and they're using faulty models, they aren't maintaining an appropriate level of reserves. Which ought to be the concern of the regulators, currently sleeping at the switch.

And there's nothing in the end to make sure the seller of volatility gets paid. Which leads to a secondary level of defaults by the seller? And eventually Worldwide Financial Armageddon. Or somesuch.

Is that the Hedge Fund problem in a nutshell, or has my go at the puzzle, allegedly of a Monet, come out looking distinctly like a Picasso?

If so, apologies. It's an odd experience, to say the least, to feel completely out of my depth. But at iTulip it seems to happen more often than not.
WDCRob,

The issue is not of dumbing down but of the impracticalities of translation of the language of the profession. I'm not sure what you do for a living. Perhaps you are a doctor. I met with doctor today and much appreciated his skill at expressing ideas that are unfamiliar to me in language I could understand. I'm sure he could have expressed in 1 minute to a professional colleague what it took him 20 minutes to tell me. Even so, I'm well aware that to truly grasp his meaning I need to not only understand the vocabulary of his profession but all of the concepts behind each word and phrase, an impossibility. That would take months.

Our modern economy relies on such a profound and widening division of labor that languages, such as the ones that medical doctors speak (and many dialects within med) and that banking experts such as Mayer speak, require translation, but even then only a surface understanding of the truths of that person's profession can be understood by those outside the profession.

This is why I believe that trust is ever more, not less, important in a society of ever increasing specialization and division of labor. The greatest paradox of our time is that while the demand for moral certitude of specialists is increasing, an environment of make-a-buck at any cost is also increasing, and these are completely at odds for society's interests. Increasing specialization and division of labor are making us all richer, but without trust they can cause classic market failures.

Health care in the US is a classic market failure. Everyone loses. The customer. The doctor. The distributor. The banker. All are in decline.

Because the system has become corrupted.

The same with many hedge funds and certain classes of credit derivatives, because there aren't enough Mayer's to explain what the problems are, never mind people like Mayer who will take career risks to do the right thing.