Comments on: Should we outlaw Hedgefunds?

By: Nicholas Gruen

Nicholas Gruen — Wed, 12 Sep 2007 07:59:48 +0000

Well put Paul. Problem is Hedgies are a global phenomenon.

By: Paul Frijters

Paul Frijters — Wed, 12 Sep 2007 04:10:55 +0000

Observa,

agree on point 1-3 but not entirely on point 4. Modern financial markets involve complicated anonymous interactions in a situation where asymmetric information does exist. That kind of thing does not work well without a high degree of trust that the asymmetric information is not abused, a trust that is ultimately enforced by sophisticated monitors and regulators. Financial markets can be so developed BECAUSE they are regulated and monitored, not despite of this. The question was whether hedge funds needed more regulation and by and large I veer to the ‘no’ camp on that one, but I’d not go so far as to disapprove of market regulation entirely which should be regarded as the police in a crowded market: not there to spoil the fun but to scare away the crooks. Sure, there’s an optimum police presence, but its not zero.

By: observa

observa — Tue, 11 Sep 2007 14:16:06 +0000

The simple rules of investment should be drummed into kids when they’re knee high to a grasshopper-
1. The greater the return the higher the risk
2. Don’t put all your eggs in one basket
3. If anyone tells you they’ve got a dead cert, they’re lying unless they’re talking to you on the Riviera with their feet in a bucket of champers. Besides why would they tell you and share the champers.
4. If a bloke from the Govt reckons he’s from the regulator, you should trust him he’s here to help, then he’s a professional mourner paid for with your taxes.

By: Mark U

Mark U — Tue, 11 Sep 2007 14:08:02 +0000

Not sure about hedge funds, but perhaps we should outlaw Powerpoint.

By: David Rubie

David Rubie — Tue, 11 Sep 2007 11:46:51 +0000

Looking at the fallout from the debt crisis, it certainly seems that they don’t add to any stampedes, but they do make them (mercifully) shorter. Any extra liquidity is a good thing – especially where it replaces the rubbish fake liquidity provided by market makers on traditional exchanges. You can quibble over their management structures and the fees they extract from the (so called) professional investors, but that’s a consenting adults thing and probably shouldn’t be subject to anything. Usually the massive management fees end up in a shareholder dividend somewhere anyway.

However, when we see them trumpeted by cabbies or flogged on late night channel 10 as a get-rich-quick scheme for leveraged mums and dads, I’d get worried. Most of the silliness should really be education rather than regulation though, but getting somebody to caution people what to do with their money is so unfashionable I wonder who will do it.

By: observa

observa — Tue, 11 Sep 2007 11:38:02 +0000

And it only takes one good shakeout for their flavour of the month status to dissolve, thereby resolving any perceived larger problem. Furthermore, just when did regulators like APRA ever have a role, other than to show up after the event and commiserate with the punter about where his hard-earned went and why. Taxpayer funded mourners are certainly not my cup of tea.

By: Jc

Jc — Tue, 11 Sep 2007 11:23:33 +0000

What Andrew said and double it.
You have to be a seasoned investor in most hedge funds before they touch you, which means you have to be counted as a professional who knows the risks involved.

There are thousands of funds around the world that can be described as hedge funds and there are about 1,000 that die each year due to bad performance.

The ones that got clobbered this year as a result of the debt mess are not the funds people expected were at risk. they were for the the most part supposed to be “safe”. They bought securities such a shome mortgages etc. that does impact the pricing of debt to the man on the street.

The also do great things. they sponsor firms by adding extra cash with the hope of taking them public and terrorise bad managements by getting them fired. The final clean up of the mess which is Coles was primarily instigated by hedge funds of a sort.

If an activity has a positive rate of return, is legal it is by definiton a plus to the economy as a whole.

By: Andrew Reynolds

Andrew Reynolds — Tue, 11 Sep 2007 08:32:38 +0000

Well said.
The other thing that often gets missed, though, is how they help the markets generally – a large part of the trading that gets done day by day on the markets is by these hedge funds. The amount of liquidity they bring narrows trading spreads enormously, reducing trading costs for everyone buying and selling on the markets – like the super funds we all have money in.
By also short selling they hasten adjustment process as well – so if the market or a currency is heading south they get it there quickly, allowing a price to be re-established before panic sets in.