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Sting of Hedge Funds: Unseen Threats to Investors and Proactive Measures by Policymakers

Over the past few decades, hedge funds have played a growing role in causing or aggravating blowups in the capital markets as well as banking systems. This guidebook exposes the reality behind the illusion of profits in the hedge fund game.

 
 
MintKit.com
MintKit.com
PRLog - Feb. 14, 2011 - PITTSBURGH -- London – Over the past few decades, hedge funds have played a growing role in causing or aggravating blowups in the capital markets as well as banking systems. The latest fiasco was the financial crisis of 2008, which ended up crippling the financial complex and slamming the real economy.

The blowup gave rise to the worst recession in more than half a century. The debacle wiped out trillions of dollars from each of the major stock markets round the globe. Another offshoot was the rubout of millions of jobs along with the squelch of trillions of dollars in lost output in the global economy.

The carnage in the marketplace led to widespread calls by the general public for the government to step in and rein in the hedge funds. The targets in the crosshairs ranged from boutique funds standing on their own to coddled groups nestled within commercial banks.

In response to the clangor, governments across the globe scurried to draw up a raft of regulations. To date, though, the hasty response has only served to trammel the financial markets while doing little or nothing to wipe out the threat for real. The lawmakers have taken the facile approach by fiddling with the symptoms rather than dealing with the disease itself.

The roots of the ailment go far beyond the obvious signs of dysfunction. “The crux of the problem lies in the lopsided pattern of reward and penalty”, explains Steven Kim, author of a new book titled Wildcats of Finance. “The enabler is the leverage that comes from financial derivatives and commercial loans. The use of pumped-up schemes allows a tiny band of hedge funds to knock down the entire complex of finance and banking. Another impact is a breakdown of the chains of production and distribution in the real economy.”

Despite the hazards in store, myriads of moneyed investors have hankered after  hedge funds of all stripes. The prospective patrons are lured into the ring by the hazy aura of vast profits swirling round the wildcats.

The image of huge profits is stoked by the crude statistics of the market, which paint a false picture of the profits in store. The pith of the problem is the patchy nature of the data sets, which cover only the pacesetters in the prime of life. The front-runners flaunt their performance when the winds of fortune blow in their favor. Then the fumblers fall by the wayside and slip out of view when the tide flips around and runs in the opposite direction.

According to a number of in-depth studies by credible researchers, the half-life of the most successful players in the field is approximately three years or less. In other words, the fresh-faced investor who traipses into the arena faces even odds that their chosen fund will break down and go kaput within a few years.

Due to the slew of sinkholes in the land of hedge funds, a thorough cleanup of the quagmire will be no mean task. Is a clean sweep of the field even possible?

“It won’t be easy, but it could and should be done”, says the author. “The main hurdle thus far has been the near-total lack of meaty information about the true nature of hedge funds. Another roadblock is the opposition of the lobby groups against any meaningful change in regulations by the government. But there are no barriers at all in terms of technical feasibility, financial logic, or economic sense.”

So what’s the solution? “The lawmakers ought to tackle the crux of the problem and not just tinker round the edges”, says the researcher. “They need to root out the blight at the source rather than clip off a few sickly offshoots here and there.”

What’s keeping the lawgivers from grasping the real problems and taking proper measures? “For one thing, there’s a great deal of misunderstanding about what’s going on in the financial forum. That’s hardly surprising, since the bulk of the data released to investors comes from cherry-picked cases and lead to deceptive results. Then there’s the opposition from the vested interests against any meaningful stroke of regulation.”

For these reasons, a heap of initiative will be required to push through a wholesome set of reforms. In the current state of disinformation and muddling, though, it’s hard to see how lawmakers – along with the investors and voters at large – can muster the strength needed to put things right.

On one hand, legions of investors doubtless nurse a nagging suspicion that there is something rotten in the vale of hedge funds. Yet most people don’t have the concrete facts needed to put their finger on the source of the misgivings.

Part of the problem is that the whole can be less than the sum of the parts. For instance, it’s not obvious to most people how a seemingly benign scheme – such as a quirky form of profit sharing – can give rise to a host of toxic effects. At first glance, the matchup of gains and losses in the hedge fund game, lopsided as it is, appears to align the interests of the operators with those of their customers.

Unfortunately, most folks notice only half of the picture. It’s the other half, which hides in plain sight, that’s overlooked by the investors.
And it’s the hidden part that carries the venom. The impact of the warped setup is to pit the interests of the custodians against those of their clients.

As noted earlier, even the mass of statistics in the marketplace presents a twisted picture of the domain. In that case, it comes as no surprise that investors are unable to reconcile the so-called facts bandied about against the hunches and fears they come to harbor.

Given the custom of using highly biased samples, the reality looks nothing like the mirage of performance painted by the usual run of statistics. The novel book is designed to serve as a basic step in exposing the brass tacks lying behind the golden sheen. The primer debunks the myths, unveils the threats, and presents an agenda for reform.

As a capstone, the book profiles the advantage of sedate investing over frenzied trading in the long run. A related feature is a simple way for the mass of investors to beat the bulk of the competition – in the form of managed pools such as hedge funds as well as individual players such as private investors – without any effort to speak of.

The guidebook is designed mainly for mindful investors focused on nurturing their nest eggs, along with earnest policymakers interested in safeguarding the financial markets and the real economy. Other types of readers range from concerned professionals in the financial community to thoughtful members of the society at large.

Further information on the book is available at the online hub called MintKit Core (www.mintkit.com).

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About the Author

Steven Kim is the founder and head of the MintKit Group, a pioneer in radical innovation and investment strategy. Within the Group, the think tank conducts research on world markets and disseminates the findings through a series of publications. One initiative is an online hub named MintKit Core, which provides information and education on investing in a worldwide economy. The topics in focus span the gamut from market dynamics and financial forecasting to portfolio management and global strategy. The author has counseled and trained self-starters in diverse walks of life, ranging from novice entrepreneurs and senior executives to international investors and public officials.


About MintKit Press

MintKit Press is the publishing arm of the MintKit Group, an innovator in research, information and education on growth in a global marketplace. The programs of research span the spectrum from surveys and analyses to outlooks and guidelines for investing in world markets. While the results are published through a variety of channels, the main hub is a newly built site located at MintKit Core (www.mintkit.com).  


Contact Information

A contact form is available at: www.mintkit.com/contact.

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MintKit Press is the publishing arm of the MintKit Group, an innovator in research, information and education on growth in a global marketplace. The programs of research span the spectrum from surveys and analyses to outlooks and guidelines for investing in world markets. While the results are published through a variety of channels, the main hub is a newly built site located at MintKit Core (www.mintkit.com).

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