Thursday, December 18, 2008
What happens to hedge funds now?
Dean P. Foster, a professor of Economics at Wharon, and H. Peyton Young, a Senior Fellow Economist, have an article on Brookings called “Hedge Fund Wizards” here, explaining how hedge fund managers can “fake brilliance” by piling on derivatives and options that will gain paper value as long as there is no collapse. Then, to use Anderson Cooper’s language on CNN 360, they can quickly become “culprits of the collapse” when there is one.
The whole question of hedge funds comes up now because investors and regulators (and certainly the incoming Obama administration) have to wonder how they can catch future Makoff’s, referring to the scoundrel who bilked investors out of more money than what is proposed for the Detroit bailout.
Sebastian Mallaby has an interesting column on p A25 of the Dec 18 2005 Washington Post, “End of the Hedge Fund?”, link here. While regulators may have learned a lesson in spotting the obvious pseudo-Nixons in the business, the “brilliance imitators” may be harder to spot. Mallaby suggests insisting that hedge fund managers put some of their own money in the funds, a reverse kind of conflict of interest.
There is also a “Federalist” Wordpress blog entry “Moral hazards in Hedge Fund Management,” here, dating all they way back to March 16, 2008, about the time of Bear Stearns.
Hedge funds are an important source of financing for independent film, and damage to their reputation is no laughing matter, for me at least. I have attended producers’ conferences in Minneapolis before and I got the impression that the SEC filings required in the business were quite extensive in most film deals. Now I wonder.
And, yes, during the dot-com boom, I knew people who went to work for hedge funds as systems analysts.