Hedging Their Way to Billions

[Robbien]

Source: NYT

Through the first nine months of 2007, three hedge fund managers had made more than $1 billion, with John Paulson and Paolo Pellegrini of Paulson & Company earning a combined $2.7 billion, Bloomberg Markets reports. That is $1 billion more than the 2006 leader, James Simons of Renaissance Technologies, made in all of that year.

Mr. Paulson, who manages more than $7 billion, “started warning his investors back in the middle of 2006 that the frenzy to build and sell housing was a bubble about to pop,” Anthony Effinger writes. “His New York-based firm, Paulson & Company, made big bets predicting the edifice would soon come crashing down. The wager paid off in the first nine months of 2007, when Paulson’s Credit Opportunities funds rose an average of 340 percent.”

Next on the list is Philip Falcone, whose Harbinger Capital Partners also bet against the housing market and earned $1.3 billion through Sept. 28.

Don’t worry about Mr. Simons, though. His earnings were estimated at just over $1 billion for the first nine months of last year.

Read more: http://www.nytimes.com/2008/01/05/business/05offline.html?ref=business

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A billion dollar paycheck just for placing bets. Taking home a billion but screaming their lungs out when Congress tried to add them to the taxpayer roles.

[bemildred]

1. Useless parasites. nt

[Robbien]

2. Not only that, the hedge funds make up 30%-50% of all stock market trades

Hard to believe that almost half of all stock market trades have nothing to do with stocks being traded, just bets on just about everything backed up by nothing but a bet.

[clarence swinney]

4. RICH MAN's CASINO

Overwhelming number of stock buy/sell do not help the firm whose stock is being traded.

It is gambling on up/down

GM did not issue stock for decades yet millions of shares were traded.

RICH CASINO IS PRIMARY USE OF THE MARKET

JUNK IT.

[flashl]

3. Sounds like they have the skills required ...

to manage the Housing & Mortgage Resolution Trust Corp thats going to be created. :sarcasm:

[Lucky Luciano]

5. Don't bash all hedge fund managers. Jim Simons

is a truly amazing guy and one of my heroes. A genius among geniuses.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ayjImYcoCiH8

[A HERETIC I AM]

6. Hey Lucky! Havn't seen you around much. Simons sounds like an interesting character....

but as far as Hedge fund managers being bashed, i think most people that bash them don't really understand what such a fund is, how they work, why they work or how they operate.

There seems to be an automatic hatred on DU for anyone that can make a large profit these days, regardless of how it is made. If it was announced that someone had been paid a billion dollars because he/she single handedly wiped out all childhood diseases worldwide, many on DU would still express outright disgust for such a person.

[flashl]

7. Please explain public benefits of private investment funds

Hedge funds are private investment funds, primarily organised as limited partnerships - in essence, betting syndicates for the very rich. The amount of money they handle, in so far as anyone can estimate this, is mind-bogglingly large. The IMF's best estimate is $1trn; industry professionals reckon $1.5trn. If hedge funds were a country, it would be the eighth-largest in the world. To invest in one of these funds, you have to put in a minimum of $1m, although that initial investment is chicken feed compared with what can be earned - if that is the right verb for what amounts to global-scale gambling. The US Institutional Investor Magazine reckons that the top 25 hedge-fund managers in 2005 earned on average $251m each in 2004 - compared with $10m for the CEO of a typical top 500 US corporation.

Hedge funds are not new - just notorious. They started to take off properly in the late 1970s when floating exchange rates and volatile interest-rate movements transformed the capital markets, and gathered momentum as technology and electronic trading became increasingly quick and soph isticated. The funds were - and are - run typically by a tight group of traders, backed usually by fewer than a hundred individuals prepared to commit a great deal of money into their hands. Today, it is estimated that there are 9,000 funds and what started as a US phenomenon is spreading - though the FSA estimates that there are at present only 325 hedge funds based in the UK.

The key features of these funds are that they trade in eye-watering risk and they are barely regulated. The two are related. Because they answer to nobody but themselves, hedge funds have side-stepped regulation and can do as they like. What they like is risk - and their main tool is "leverage" - borrowing to play the markets. It is not unusual for a hedge-fund investor to control $100m in securities with only a $5m down payment. Of course, that means that when a bet goes wrong, it goes spectacularly wrong. If the hedge-fund industry's positions in the market are 20 times the cash they actually hold, their potential impact on the world financial system is about equal to US GDP.

Read Full Text

[A HERETIC I AM]

8. Is this a test? What is the passing score and how is it being graded?

I never said there was a public benefit of a private investment fund but the benefits exist, with out any doubt. If a pension fund is able to use a Hedge Fund in order to provide regular, consistent returns over time regardless of market direction, is that a bad thing for the beneficiaries of the pension fund? If an endowment that funds an art museum or a school or a research center or a Hospital or any number of privately funded, public institutions is able to do the same thing, is that not a benefit to society?

Hedge Funds have gained notoriety because of some very highly publicized difficulties experienced by a small handful of them. Not all hedge funds have invested in the sub-prime market and those that have taken losses because of such investments represent a small fraction of the total number. I could show you dozens of Mutual Funds that have had extraordinary losses over the last ten years but they don't make the news. Hedge Funds make the news because they just simply aren't for everyone, and that pisses some people off.

On edit to add that the author of the piece you quote above has not done her homework and has several inaccuracies in that article, a number of them in the snippet you posted.

Facts About the Hedge Fund Industry

* Estimated to be a $1 trillion industry and growing at about 20% per year with approximately 8350 active hedge funds.
* Includes a variety of investment strategies, some of which use leverage and derivatives while others are more conservative and employ little or no leverage. Many hedge fund strategies seek to reduce market risk specifically by shorting equities or through the use of derivatives.
* Most hedge funds are highly specialized, relying on the specific expertise of the manager or management team.
* Performance of many hedge fund strategies, particularly relative value strategies, is not dependent on the direction of the bond or equity markets -- unlike conventional equity or mutual funds (unit trusts), which are generally 100% exposed to market risk.
* Many hedge fund strategies, particularly arbitrage strategies, are limited as to how much capital they can successfully employ before returns diminish. As a result, many successful hedge fund managers limit the amount of capital they will accept.
* Hedge fund managers are generally highly professional, disciplined and diligent.
* Their returns over a sustained period of time have outperformed standard equity and bond indexes with less volatility and less risk of loss than equities.
* Beyond the averages, there are some truly outstanding performers.
* Investing in hedge funds tends to be favored by more sophisticated investors, including many Swiss and other private banks, that have lived through, and understand the consequences of, major stock market corrections.
* An increasing number of endowments and pension funds allocate assets to hedge funds.

Popular Misconception

The popular misconception is that all hedge funds are volatile -- that they all use global macro strategies and place large directional bets on stocks, currencies, bonds, commodities, and gold, while using lots of leverage. In reality, less than 5% of hedge funds are global macro funds. Most hedge funds use derivatives only for hedging or don't use derivatives at all, and many use no leverage.

Benefits of Hedge Funds

* Many hedge fund strategies have the ability to generate positive returns in both rising and falling equity and bond markets.
* Inclusion of hedge funds in a balanced portfolio reduces overall portfolio risk and volatility and increases returns.
* Huge variety of hedge fund investment styles – many uncorrelated with each other – provides investors with a wide choice of hedge fund strategies to meet their investment objectives.
* Academic research proves hedge funds have higher returns and lower overall risk than traditional investment funds.
* Hedge funds provide an ideal long-term investment solution, eliminating the need to correctly time entry and exit from markets.
* Adding hedge funds to an investment portfolio provides diversification not otherwise available in traditional investing.

From: http://www.magnum.com/hedgefunds/abouthedgefunds.asp


One can be a capitalist and a progressive thinker at the same time. The two are not mutually exclusive.

[flashl]

9. I merely posed a question and gave a reference point.

[A HERETIC I AM]

10. Fair enough. And I gave an answer that i admit might not satisfy very many. n/t