Hedge Funds and the U.S. Financial Markets.

Interesting post.
Its not real surprise hedge funds are gaining in popularity. They have many more options and flexibility in their investments as opposed to mutual funds, liquidation arbitrage, shorting, private equity, etc. They have gotten a bad rep, and the blowups have been shit on in the media quite a bit. One could argue that the hedge fund blowup rate is just a function of the inherently greater risk taken on by the often aggressive strategies they use. Just some thoughts.

As for the US Empire falling. I agree with that article, it's true. I'm not too sure about using the correlation between our "physical productivity" and our financial market growth as a legitimate quantitative measure of our economy being a farce... Everyone knows Asia is turning into the manufacturing center of the world, while the US economy is shifting towards a service based economy. Companies like GOOG, YHOO, EBAY are large companies that have zero impact on our export numbers, but make no mistake - they are exported services, and are heavily used in many places around the world.

Although I agree the US manufacturer sector is definately falling off. Just look at domestic human migration patterns from the rust belt to the coastal cities. Cities like Detriot are dying from the inside out....
 
I don't see why you're surprised that there are more mutual funds than stocks themselves. People frequently say this as though it's something absurd and unexpected. It isn't.

For every x stocks, you have at least (x^2)-1 combinations of possible indecies... 50 stocks gives 2499 possibilities of funds... it's obvious why there would be more mutual funds than stocks in any, healthy market.
 
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September 24, 2006

SouthAmerica: This past week we had another major Hedge Fund blow out. These guys managed to lose $ 6 billion dollars in a short period of time.

I like to post one more time a portion of one of my articles that were published about 2 years ago.

I am sure, and I have not changed my mind that the next stock market meltdown in the United States is coming and will be worse than in 1929.

How it is going to happen?

History tells us that there are many economic parallels between the 1920's and today. But there are some major differences as well.

Around the time of the stock market crash of 1929, people needed very little money to buy stock on margin. Basically they borrowed most of the money to buy their stock.

Today people need a lot more money up front to buy stock on margin, and there is less exposure to that type of risk.

In the other hand, today there is the derivatives market with trillions of dollar at stake. The derivatives market today it will become the “trigger of a massive collapse” in the stock market similar to what “margin” represented in the stock market collapse of the 1930's.

One of the major problems that the financial markets in the United States are facing today is that they are losing credibility around the world. At the same time there are many emerging markets in development around the world that are becoming an alternative option to investing in the United States.

Today, there are too many scandals going on in the US. From the S&L scandal of the 1980's (taxpayer bailout $ 200 billion dollars), to the dot.com scandal of the late 1990's, the recent mutual fund industry scandal, and also the current insurance industry scandal, we also had all sorts of other corporations scandals such as Enron, WorldCom, Arthur Andersen, and so on…….

Very soon we will have a real estate bubble bursting here in the US that also will turn into a new major scandal.

We also have a major companies pension scandal under way in the USA. (You don’t need to be a rocket scientist to figure this one out – all you need it is basic common sense.)

…Eventually everything starts feeding on itself into a downward spiral. The question is: what will trigger this economic implosion? Possibly, a meltdown of the US dollar could create the biggest international monetary crisis in world history, or the collapse, the domino effect, and massive meltdown in the derivatives market…..

The chain of events will start this time around with a meltdown in the "DERIVATIVES MARKET."

You can bet on that.



************



“On Wall Street: Lessons of the Amaranth meltdown”
By Saskia Scholtes in New York
The Financial Times - UK

http://msnbc.msn.com/id/14959761/



*****


Cover Story – September 24, 2006
Globe and Mail - Ca

“It looked like a hedge fund”
Amaranth Advisors promised modest returns with little risk. But then it made increasingly bigger bets on a single commodity, until it all blew up
BY: SINCLAIR STEWART AND PAUL WALDIE

http://www.theglobeandmail.com/servlet/story/LAC.20060923.RAMARANTH23/TPStory/Business


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One needs to understand risk/reward situations:

People with $10,000,000 can and do risk some of that money all the time....$500,000 is only 5% of total asset!!!....good money management is it not?.....lots of people put money in drilling programs......hit dry hole.....money gone, zip, nada....money in new business start-ups.....think of all dot.com businesses....both public and private....money gone....

Hedge funds not that risky as compared to other investments....press tries to compare to T-bill and mutual funds...wrong comparison....

Mutual funds just glorified savings accounts....they tout making 7%, for example.....really "made" only 2% as I can take money to bank, buy CD for 5%....no risk...no fees....so mutual funds only increased that by 2% with added risk and fees, LOL....clowns..


SteveD
 
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The New York Times – Sunday, September 24, 2006
Editorial: Regulating Hedge Funds

As debacles go, the one last week at the hedge fund Amaranth Advisors was orderly. The fund’s star trader had bet big that natural gas prices would rise.

They fell instead. On Monday, the fund admitted it had lost more than $3 billion, a sum later pegged at $6 billion.

And yet, as of Friday, the fund, though badly battered, had managed to avoid liquidation.

It could have been much worse — and not just for the investors who were burned.

Hedge funds — largely unregulated investment pools for wealthy individuals and institutional investors — have infiltrated every corner of every market, taking big risks for big returns.

Market players know that big risks can also mean big losses. But in the days after Amaranth’s meltdown they were unnerved by what they did not know, such as how much of Amaranth’s bet had been made with borrowed money.

If questions about the fund’s ability to make good on its obligations had persisted — or if a default had ensued — markets would have been vulnerable to a debilitating chain reaction in which financial entities like banks and brokerages slam the brakes on deal making, hoping to avoid the accident unfolding in front of them.

That didn’t happen this time. But Amaranth is only one of 9,000 hedge funds that collectively manage an estimated $1.2 trillion in assets — a size and scope undreamed of a decade ago. Not all hedge funds throw borrowed money at hot-handed traders to make outsized bets. But it would be naïve to think there aren’t more shocks in store.

With that in mind, regulators need to act now to translate their various calls for hedge-fund oversight into enforceable rules and, in some instances, into concrete proposals for Congress to enact.

A week before the Amaranth debacle, the president of the Federal Reserve Bank of New York, Timothy Geithner, said in a speech that the growth in hedge funds would eventually force regulators to think about ways to better protect the financial system.

Eventually is now. Two years ago, the Securities and Exchange Commission passed a rule to register hedge funds, with the goal of greater oversight of pension investments in hedge funds.

The rule was flawed, and was overturned in court. But the aim was a good one. The S.E.C. should pursue a focused set of hedge-fund reforms and Congress should pass a law to prevent pension funds from investing in hedge funds that do not submit to federal regulation.

Congress should also repeal a law from 2000 that limits regulators’ ability to monitor over-the-counter derivative securities — financial instruments not listed on the exchanges. That market has grown markedly in recent years and contributes greatly to hedge funds’ wheeling and dealing.

Policy makers know hedge funds cannot adequately police themselves.

What are they waiting for?


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June 27. 2007

SouthAmerica: Here are some of the casualties of the derivatives mine fields: first LTCM, then Amaranth, and now the Bear Stearns Hedge Funds.

Who will be next?

Who knows?

I wonder how many “ticking time-bombs” is scattered all over the US financial markets including the Hedge Funds, Pension Funds, Insurance companies, and major American banks?

“Derivatives are financial instruments of mass destruction.” - A quote from Warren Buffett, the world's most successful investor, published on Fortune, 17 March 2003.

In my opinion, a global derivatives meltdown will be the major cause that will trigger the next major worldwide depression.

For all practical purposes the global derivatives market is on automatic pilot and just "God" knows what is really going on inside that market.


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Excellent Commentary....As Usual....
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One of the main contributors to the major WS firms record profits has been the bond segment....

Bonds used to create the LBOs....Subprimes used to create mortgage backed pools ....etc...etc...

The fees are higher for these categories ...than the standard and more transparent WS products.....

Transparency.....and ratings accuracy certainly come into question regarding recent events....

And when these questionable products are suddenly marked to market in an abrupt downward manner.....is the risk ...that is now imposed on the financial system.....

A 10 %....40% mark to market revision....essentially wipes out these supposed values....and all linked contractual obligations would of course be affected....
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What is very important is that you have qualified people working in government...which hopefully will not create further chaos....such as the tax reform act of 1986....which eliminated much of the value of commercial real estate...

This is a much bigger issue....and requires a delicate balancing act....to minimize damages....This is far bigger than the S&L fiasco whereby Bill Seidman performed a stellar recovery effort.....
 
When Amaranth went, it hurt all the stocks in all the sectors they were long.

I don't think we've seen all the effects of the Bear Stearns funds, yet. A month from now we'll still be hearing about funds and companies that took large losses as result of loan value writedowns. They were offering 30 cents on the dollar for them I heard. That's going to put a lot of lenders in a world of hurt. I think we'll find there were many companies holding this debt that we would never have suspected.
 
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August 10, 2007

SouthAmerica: That’s a good thing that Wall Street believes in free markets and when there is trouble let the free market work things out and Wall Street don’t believe in government interference of any kind.

Otherwise the Wall Street types such as hedge fund managers, private equity fund managers and so on…they would all be crying and saying that the end of the world is near if the US Fed does not lower the Fed Funds Rate and so on….

And Wall Street also would be crying, “Please bail us out”.

But Americans don’t do this type of whining, because Americans believe in free markets without government interference.

As the gods of capitalism preach all the time on television such as on various programs on CNBC: “Let the free market work it’s magic and work itself out.”

Various experts are saying that there is plenty of money on the sidelines just waiting for prices to decline to a level where they feel it is time for them to go bargain hunting.

If there is so much money sitting on the sidelines then why it is necessary any government interference?

It is a self-inflicted crisis anyway!!!!!!!!!

Besides, when you go to the racetrack and bet on horse number 2 and horse number 5 wins the race – you don’t ask the government to bail you out because you did pick the wrong horse.

The same thing happens in Atlantic City or Las Vegas – when you play roulette there are 36 numbers plus the 0, and 00.

In Vegas you can get a better odds since they have only the 0, when compared with Atlantic City where you have the 0, and the 00.

You do your mathematical calculations and place your bet wherever you decide is your best bet. But after you lose and your bet does not come up you can’t go and ask the government to bail you out.

If instead of roulette you prefer to should crap – that it is your choice, but again after losing on your bet don’t go crying and ask for a government bailout.

I wonder why people in Wall Street thinks that capitalism and free market theory it is good only when all the markets are going up and everything is working according to plan?

On a down market – then free market theory and practice becomes a dirty word – then you need market breaks, government intervention, and so on….

In a real free market economy when you design a flawed product eventually you would pay the price – and the price can be as high as you have to close shop and go out of business and lose everything.

And that is the name of the game.


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August 10, 2007

SouthAmerica: On the other hand, Europeans are not so naïve about the magic and efficiency of free markets.

That’s why the European Central Bank (ECB) acted so quickly and made a major interference on the workings of free markets in Europe when they intervened by making available over US$ 130 billion dollars – a larger interference than when they were forced to react on September 12, 2001.

Why such a large amount?

Because they are aware of other blow offs that are in the pipeline and have not been made public as yet.

You don’t need a PhD. in common sense to figure that one out.


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