Hedging Disaster

[tbyg52]

The burgeoning hedge fund and private equity industries are both a cause and a symptom of a dangerously lopsided America. Because they are private (not listed on stock exchanges or offering shares to the public), these funds do not have to disclose their inner workings to regulators or to the public. Yet these unregulated funds are increasingly buying and selling some of our largest corporations, stripping assets, piling on debt, leaving employees and subsequent buyers to dig out of a deep hole.

The difference between hedge funds (unregulated mutual funds for very wealthy individuals) and private equity (privately held firms that buy and sell entire companies) is collapsing, creating an unregulated sector of wild-west financial engineering rife with conflicts of interest.

http://www.prospect.org/cs/articles?article=hedging_disaster

[papau]

1. until derivatives are market to market with a proper risk charge, the game will

continue.

[tbyg52]

2. Like I know what that means....!

All I know about these hedge funds is that they are virtually unregulated and highly leveraged. Which smells like 1929 even to one as financially illiterate as myself.

[A HERETIC I AM]

3. What he meant to say was "Marked" to market", not "market to market"

When a security is marked to market it means simply its value is adjusted for the daily changes trading has caused. A Mutual Fund's share price is marked to market every evening after the markets close. The tally of all the equities (and/or bonds, preferred stocks, convertibles, whatever) in the fund are collated and the mutual funds share price is adjusted for the days activity.

The problem with many of the Hedge Funds making news is that they do not go through the same process. They don't have to, legally and that is part of the problem. It is a fact however that many of the Hedge Funds contain publicly traded securities so the managers can actually know what they are worth. There is simply no requirement to disclose. Why? Because they are private Hedge Funds, sold to select investors who are able to withstand substantial risk for substantial reward. Many Hedge Funds utilize particularly sophisticated strategies that are able to produce returns whether the market is rising or falling such as covered call writing and naked put options as well as involving commodities, futures and currency trading.

Papau is wrong however on one point. They won't continue if the investors that participate see them as too risky or otherwise not worth it, whether they are marked to market or not.

[papau]

4. Thanks for correcting my typo - Bear Stearns will be the test case about investors

fleeing without mark to market.

If it does happem - the fleeing because of too much risk - we will look back and say "why did I not short Bear Stearns"!

[tbyg52]

5. Thanks, I get it now.

I wouldn't have gotten it even without the typo, so thanks for the explanation!

In a nutshell, then, hedge funds say what they are worth when they darn well feel like it, or don't if they don't.

With regard to the sophisticated strategies, I was reading that that used to be the case for most of them, but with the popularity of hedge funds there's been a dearth of talent, and also a lot of them going out of business (that haven't made the news).

I've read at *least* three or four articles on hedge funds in the past month or so, and they all scare me. This is the second time I've posted one here, but nobody pays much attention, so far.

[A HERETIC I AM]

6. Actually, DU counts among it's members one individual who does sophisticated options trades

I won't mention his name for his own privacy but i know there is at least one (probably a few) options traders.

Your comment re: talent is not far from the mark. It is a highly specialized discipline and to be good at it (read consistently profitable) a trader has to be knowledgeable on or have access to information on a wide variety of pertinent factors that affect individual companies, industries, sectors and entire asset classes. Will GE be up or down in 6 months from where it is today? Why? Will the Cessna division of Textron sell more airplanes this year than last thus pushing up Textrons share price? Will corn be plentiful in the summer of '08 or scarce? Are there enough feeder cattle for the summer barbecue season or not? You get the drift (Yes, corn, and cattle are commodities, but my point i think is clear)

The people that can sift through the enormous amount of information and news and make decisions that can make or lose millions are most certainly not a dime a dozen.

If the DU'r who i refer to sees this post and cares to speak up, he is much better versed at the complexities of these sort of things than i am. Careful though. He has left many readers of threads scrambling for Google to figure out a single sentence!

On edit to clarify; I am not aware of the firm the individual i mention works for. I am not in a position to suggest he works for a Hedge Fund at all. I have had brief conversations via PM and on other threads however.

[tbyg52]

7. I'm hoping the not-so-sophisticated

and the MSM will pay attention also, before this thing blows up.

At least one of the articles I've read mentioned outright manipulation, as well.