Never really understood them.
In principal, a hedge fund trader protects the value of assets he owns against market-driven fluctuations by buying puts, shorts and straddles on a sprinkling of stocks, on the theory that market moves don’t gore all oxen equally. Losses on favored stocks would be offset by gains on short sales of disfavored stocks. It would all equal out!
Meaning, basically, that you’d be just as well off stuffing your money in the mattress. I didn’t get it. Still don’t.
But all the rich folks seemed so fond of them, and all the traders seemed to be getting wealthy off the rich folks’ fondness. What is it that they knew that I didn’t?
Turns out, maybe not so much:
Investors scrambled to assess potential losses from an alleged $50 billion fraud by Bernard Madoff, a day after the arrest of the prominent Wall Street trader.
Prosecutors and regulators accused the 70-year-old, who was chairman of the Nasdaq Stock Market in the early 1990s, of masterminding a fraud of epic proportions through his investment advisory business, which managed at least one hedge fund.
Hundreds of people, investing with him through the firm’s clients, entrusted Madoff with billions of dollars, industry experts said.
“Madoff’s investors included captains of industry, corporations — some of which are publicly traded — that used Madoff almost as a high-yielding cash management account, endowments, universities, foundations and, importantly, many high-profile funds of funds,” said Douglas Kass, who heads hedge fund Seabreeze Partners Management.
“It appears that at least $15 billion of wealth, much of which was concentrated in southern Florida and New York City, has gone to ‘money heaven,’” he said.
Sucker born every minute.
I’m taking an informal poll on this. It all sounds just like Social Security…
I read this early this morning. I don’t get any of that crap either (sounds so much like putting equal amounts on the red and the black… and then getting what? Zero?). But, now I gotta figure out just where in the hell “money heaven” is too.
A fool and his money shall soon be parted. Seems that they already were. How old is that saying….If it sounds to good to be true, it probably is.
And A LOT of those suckers live on Palm Beach. Big big bucks lost in this… the Island is reeling from it.
Trickle down effect… we’re having a tough time in the housing market (FL is one of the big states really hammered by the housing issue), we’re in the midst of the recession (or whatever it is) like everyone else, but we always had the people on ‘The Island’ that were for the most part not affected. Now they’re absolutely shaken and its not good for our bubble economy down here either.
I know, to a lot of people they’re rolling their eyes and thinking, “Big deal”, but to some of the people who live in the areas where the suckers live… it is a big deal.
We know someone who called their broker and yelled at him, “I know people who pulled their money out and are STILL making 18%. WHY can’t you do this for me?!” Turns out all those people were with Madoff. They were making… 0%.
Bou-
“Embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery.
(This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth .)
At any given time there exists an inventory of undiscovered embezzlement in – or more precisely not in – the country’s business and banks. This inventory – it should be called the bezzle.
-JK Gailbraith, The Great Crash
I have a brother-in-law who’s a hedge fund manager for ING in The Hague. He’ll be here for Christmas and I’m looking forward to picking his brain about all this. Word from Europe is that the job is rather on the stressfull side these days.
In its simplest form, a hedge fund makes money by going both long and short. In plain english, buying investments (going long) that are perceived to be undervalued, and selling investments they don’t have positions in (selling short) that they believe are overvalued.
The reality is that if anyone can explain it, we’d still be here next Sunday. The investments and strategies that are involved can be so esoteric as to be unbelievable; They literally defy explanation. A few simple rules for investing:
If you don’t underatnd it, don’t buy it.
If you can’t afford it, don’t extend yourself for it.
Don’t throw good money after bad.
I have a slightly longer piece of advice from Ben Graham to Warren Buffet, if anyone’s interested. As the old asying goes, if you sit down at the poker table, and can’t figure out who the sucker is after 30 minutes, it’s you.
I spent a couple of years in the hedge fund business. It was a good learning experience. There are many many kinds of hedge funds, and what they have in common is they are unregulated instruments of greed. Some are run by good people and some by charlatans.
The business got very, very crowded in recent years. But the thing that killed most of the funds was the collapse of the investment banks. Greatest margin call of all time as the investment banks ran out of money rather unexpectedly. This certainly exposed the charlatans, but pretty much wiped out all the firms with margin debt.