Time to Prune the Hedge

One of the biggest contributors to our current economic crisis are the hedge funds.

InvestorWords has the following definition for a Hedge Fund:

A fund, usually used by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Hedge funds are exempt from many of the rules and regulations governing other mutual funds, which allows them to accomplish aggressive investing goals. They are restricted by law to no more than 100 investors per fund, and as a result most hedge funds set extremely high minimum investment amounts, ranging anywhere from $250,000 to over $1 million. As with traditional mutual funds, investors in hedge funds pay a management fee; however, hedge funds also collect a percentage of the profits (usually 20%).

To “hedge” means to manage risk — exactly like “hedging a bet”, for that is exactly what is going on. It is using a gambling stake to make a bet that will guarantee a return on that bet.

Any given money manager may make an allocation/investment that could be described as speculative; if this same manager simultaneously makes an allocation to an allocation/investment specifically designed to balance or counter-act any negative performance from his speculative position then this would be his “hedging” position.

So why the sudden interest in hedge funds?

One of our country’s major manufacturers is being forced into bankruptcy because a few hedge funds felt that they could profit more on their investment in a bankruptcy court than to accept a smaller profit on their investment. (note that they would have received a profit, not a loss, under the deal that was offered to them.)

Chrysler, their stock holders, the unions, and even their debtors were willing to make major concessions to pull the company out of its current financial crisis. Fiat was willing to invest money into a partnership with Chrysler, and the US Taxpayer has invested $4 Billion to make this work.

This just goes to show that while We the People are spending our tax money on bailing out these greedy bastards from the mess that they had a major part in creating, they are still unwilling to make any substansive changes in the way they do business.

It is time to prune the hedge funds. They aren’t productive for anything but making obscene amounts of money off of other people’s money. They should be illegal.