American Reporter – Being a natural worry wart I clucked my tongue repeatedly when both the self-sanctified New York Times, and tv stock broadcasts alerted investors and general consumers tothe coming hedge fund train wreck.
As with many of the scare tactics to grab headlines, there are grains of truth to the fears. Because of the nature of the hedge fund industry itself, the grains might even mount up to silos of danger, but let’s put first things first.
Hedge funds are like risky, very sophisticated, often computer-driven mutual funds originally designed for the super wealthy who were ready and willing to take more risk for more rewards. In the early 1990s a hedge fund needed 40, 50, or even 75 percent returns per year to be a “player” and attract more millionaire clients. The funds were largely unregulated and extremely restrictive as to if, or when, you were allowed to pull out your money.
The New York Times report worried that as more airlines, auto makers, and Enron-style frauds are creating weaker retirement accounts, the government and the taxpayers bear a larger bail-out burden. When pension managers need a “home run” to make up for years of negative returns or only modest gains, they tend to hand off money to managers whose track records and personnel have spotty records and/or employ riskier investment strategies.
Let’s point out that similar concerns were raised two or even three generations ago when trust companies and insurance companies started investing in real estate developments; marinas and resorts; cattle ranches, jojoba bean plantations; oil and gas limited partnerships; rail car and airline leasing deals; shrimp aquaculture in Central America; and gigantic office complexes along the Thames in London. All new and innovative investments raise eyebrows. Sometimes they become bedrock core holdings, such as real estate, and sometimes they lose money and fade away. Thus, the concept of a super-mutual fund with lots of transactions, commissions, short-selling and so forth is not bad or good per se.
The reports on CNBC-TV and Bloomberg Television a few days after the Times story echoed reports that some pension fund managers are heavily speculating in the “junk” or even “defaulted” fixed income instruments (another name for bonds) of distressed companies. If true, this story would involve criminal activities which make the usual insider trading cases amateur night at the opera.
