Yesterday, the WSJ reported how "ponzi" reportings seem to have proliferated after Madoff's revelations. Several factors can be thought of as contributors toward these being discovered. For example, people asking for their money can put strains on the scheme.
We could actually do the determination sooner, using techniques like truth engines. Actually, in Madoff's case, just asking the right questions would have worked; that is, following through further than just taking the guy's word. Collusion (story of an Irish hot dog banker, another poster boy) does come to mind as apropos.
In a sense, the madeoff/ponzi is the poor (non-rich, ok?) man's hedge fund. That is, the hedge funds screen out by the client's pocket's abundance and offer huge returns. So, that they get away with this (a future post will deal with the ethics and legitimacy of that whole game), including some outrageous practices (see below), sort of lets the non-rich person think that someone claiming to know how to get major returns (say, 48%) has to be legit. Didn't they hear similar about a hedge fund (ah, even Harvard bragging)?
Folks, do the hedge funds make any sense only in a culture of excess (other than helping the managers gather bucks)? That is, do we not have too many presses printing too much money? These funds were originally a method for those with an excess of accumulations (again, near-zero sum game, any big pocket, by necessity, is the result of milking oodles of the hapless -- It is encouraging to see empirical studies being done, such as UMass - Amherst).
Some of the characteristics of the hedge funds are bothersome. Take the opaque nature (please). Supposedly, it's to cloud their strategy. How many of these have been studied (see Hedge Fund Center)? I'm not talking just comparative results; that's a silly game. Too, these funds' public flogging of companies makes them like the taliban of business. For this, think about the video of a street in a city near Iran (you know the country) where some sharia law enforcers are holding down a guy in the street and going at it on his back for some infraction (judge, jury and executioner all rolled up into a roving band of thugs).
So, some have argued that hedge funds keep companies in line, the short-sell argument, in short. Oh, they're the conscience (dealing in rumours, see below) of the economy, so to speak? Sheesh, it would be more like a plague in a sense; what can these guys do that is constructive?
Consider this, the farmer helps us with eatables, the factory person provides us cars and planes, the landscaper cuts our grass, the doctor gives us our daily pills, ..., oh wait, those last two are services. In a sense, the hedge funds do provide a service but ought this be allowed in wild-west framework that they expect.
Again, consider this. We have social and legal constraints on various types of abuses. We are not allowed to exploit some person just because they are without power to stop us.
Well, hedge funds, in a sense, exploit little quirks in the economy (which is our body). If they were pure bottom-feeders, it would be okay (picking up exfoliates, etc.). But, no, their intent is to drive things. And, can we honestly say that, as a whole, they do any more than drive things into the ground?
As said, this is only a start of a series. And, I might add, that if some positive notion can be identified by this technique, I'll say so. What are the chances that the collection of things positive about hedge funds would outweigh their problematics? Well, that is one motivation here.
Remarks:
01/20/2013 -- Busyness (where is the sandbox?). The recent Business Week had something interesting article (Steven Cohen, of SAC Capital). Some employed in the business have misgivings about their ways of doing things. One talker, under questioning, was asked if he knew of any hedge fund that was clean, or above reproach using the old concept (as in, no shady dealings). No, he said. They could not survive, otherwise. It's like doping.
11/29/2011 -- Ah, Big Ben helped his friends more than he said, at the time.
05/17/2011 -- Hedge funds need some of our attention.
10/11/2009 -- Discussion has gone over to FED-aerated. Note the 10/11/2009 Remarks about the Business Week article on India's progress' inhibitors. 'Near zero' recognizes that some always suffer more than others, especially in win-win situations, as the whole notion of characterization minimizes visceral reactions by diminishing the real in favor of the abstracted (ah, the modern world, you say?).
09/11/2009 -- Win and lose. Everyone wants the former. The latter actually is what balances the equation.
08/17/2009 -- As promised, FEDaerated is here.
04/17/2009 -- Minsky and the facts of ephemeral value are a couple of topics on the list.
03/30/2009 -- Near-zero will be looked at more closely.
01/30/2009 -- Hedge funds are about risk management, according to sanitized views, and may very well have a rational basis. Yet, various motives, which probably come out of the lack of control, seem to demonstrate that which Minsky tried to describe as the inevitable descent to a stench.
Modified: 01/20/2013
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