<p>You can tell liquidity is a hot topic. All the college annual reports have a “note” about how much cash can be raised from the endowment in 30, 90, or 180 days.</p>
<p>That was interesting…they even changed the meaning of the 3 tiers. Used to be tier 3 mainly referred to investments that had no public market-now tier 3 just seemed to reflect that the investor(the University) had no ability to ask for their investment back.</p>
<p>What shocked me was that at many of the top Universities over 50% of hedge fund investments were classified as tier 3 meaning they could not request a withdrawal. That seems incredibly high. Traditionally hedge funds were set up so you could withdraw your investment atleast on a quarterly basis. Shows that Hedge funds have become much riskier and illiquid than they were originally planned to be–there’s not much hedge left in hedge funds.</p>
<p>Speaking of hedge funds:</p>
<p>sm74 - Are you talking about true hedge funds, or all private equity vehicles? I agree: What I would call a “hedge fund” tends to do high volume long-short trades in liquid investments, and almost always permits monthly or quarterly capital withdrawals. Given their investment discipline, that isn’t a major problem, and there are safety valves to prevent a run on the fund, anyway. But things like buyout funds, or venture capital funds, or vulture funds – they are all highly illiquid, and rarely if ever permit investors to exit at will.</p>
<p>It wouldn’t surprise me at all if true hedge funds constituted less than 50% of a university’s private equity portfolio. It would surprise me a lot if less than 50% of hedge funds were permitting capital withdrawals anymore.</p>
<p>Some of the largest hedge funds seem to have insider trading problems…</p>
<p>SAC…Citadel…</p>
<p>I wonder how this will play out…</p>
<p>Redemption wise…</p>
<p>JHS-the Universities that I follow generally use 3 categories for their more speculative investments—Private Equity, Hedge funds(sometimes called Alternative Investments), and Real Assets(real estate/timber/Gold) so hedge funds are seperate from private equity.</p>
<p>Using major hedge funds like Harbinger or DE Shaw as examples it is clear that many hedge funds have crossed over into private equity-DE Shaw tried to build a real estate development and lost their shirt on that, and Harbinger is building some sort of satellite network and in deep trouble with that. My guess is that one aspect of private equity that is especially appealing to the hedge fund people is they get to decide what the value is of their investments. Nice thing to have when it comes time to decide how much the hedge fund manager makes at the end of the year. Come to think of it I wish I could do that.</p>
<p>[Judge</a> Allows Wiretaps in Galleon Case - NYTimes.com](<a href=“http://dealbook.nytimes.com/2010/11/24/judge-allows-wiretaps-in-galleon-case/]Judge”>Judge Allows Wiretaps in Galleon Case - The New York Times)</p>
<p>Dstark-this is really, really bad news for the Hedgies. If Universities aren’t already doing everything they can to get out of many of their Hedge funds I think they are going to be pretty soon. These wiretaps are going to finally reveal just how slimy this world is.</p>
<p>sm74 - not really, at least yet. Despite all the noise, no one really knows the depth of the investigation. It also looks like the SEC is again trying to change the rules of the game in midstream by redefining what kind of information is a no-no to trade on. In any event the hedge fund sector is big enough to survive this, and institutions will continue to put money here. </p>
<p>And with regards to your three definitions - Alternative Assets covers Private Equity so there might indeed be overlap for institutions that use that definition.</p>
<p>[Arrest</a> in Insider Trading Inquiry - NYTimes.com](<a href=“http://dealbook.nytimes.com/2010/11/24/arrest-in-insider-trading-inquiry/]Arrest”>Don Chu Arrested in Insider Trading Inquiry - The New York Times)</p>
<p>Based on this arrest it appears that this is good old-fashioned tipping of very material, non-public information. After all the hedge funds are paying very good money for information-I don’t think they would be paying what they are for information that is publicly available.
I’m not sure about the future of hedge funds or what the value is of hedge funds. It seems that about the only way they seem to be able to beat the market consistently is by getting inside information. I haven’t seen any evidence that the guys running hedge funds are any smarter investors than me or you so why are Universities paying them 2 and 20 and making them rich.</p>
<p>Hedge funds are supposed to be speculative investments that offer higher yields then traditional investment funds, because they tend to work in the outlying portion of investing, taking on what seem like large risks and so forth. Hedge funds as originally envisioned were supposed to be the province of high wealth investors willing to risk their capital in return for what could be spectacularly high yields…(most hedge funds have a gateway access of a million dollars+). Basically, the concept behind hedge funds (and a related type of fund, private wealth management) is that the people investing here knew the risks and were willing to do that…</p>
<p>Their name indicates how hedge funds operate.Unlike traditional funds, that for example in mutual funds use baskets of similar kinds of stocks to derive their income (for example, a fund based in the value of the stocks in the Fortune 500; or a small cap fund that is composed of smaller, more risky companies that can return a higher yield then mid size cap companies) they don’t trade just one product, they in effect invest different products against one another. Thus, they might have baskets of forex (foreign exchange) instruments or futures, derivatives in another market, stocks, bonds, you name it…the name itself is based around the concept of hedging, which in theory at least is all about trading to bring risk as close to 0 while maintaining yields. They use complicated models, that assume that if a certain event happens (like China going into an inflationary period) that the way to hedge such an event would be to have a position in some sort of forex derivative (put, swaps) to hedge against that happening, where if that happened it might cause stocks to plummet but cause their hedge derivatives to go into the money. they use all kinds of proprietary models built upon the basic work done by people like Scholes and Black and company to do these kind of things…</p>
<p>The problem with these is no model can be that accurate. Back in the late 90’s long term capital in Connecticut was working with one of the people who conceptualized the issue (won a Nobel for it I believe), and they were doing spectacularly, until the Russian and Asian currency crisis in the late 90’s caused them to crumble…the fed ended up negotiating a bailout for them, because they were so large that if they went under, it would have tanked the economy. </p>
<p>The problem with hedge funds and similar funds is that basically they have become major players in the markets, because they can return spectacular returns, the problem being they had so much in them, that if they failed it could make long term capital look like nothing…and it also meant that hedge funds have been involved in making the kind of idiotic speculating we have seen lead up to the economic collapse…why is this so? Here are some of the things that have made hedge funds such a mess:</p>
<p>-Unlike mutual funds, they have no reporting requirements. Hedge funds were given that kind of carte blanche because they were supposed to represent well heeled investors, who could afford any losses in their speculation, if that were true then generally if a hedge fund goes under, it would only affect investors involved, and their impact would be relatively small</p>
<p>-Problem 1- Hedge funds started getting investments put into them by institutional investors, like pension funds, some mutual funds, endowments <em>ahem</em> and so forth, seeking higher returns. I don’t know when the law changed (or if there even were formal laws), but until fairly recent years traditional investment houses either didn’t want to invest there, or weren’t allowed to (I have heard both things, even compliance people aren’t too sure). As a result, a lot of ‘ordinary’ people’s money was tied up in these, pension funds, 401k’s, you name it…and if they went under, well, imagine, it would have made what did happen look good. </p>
<p>-Problem 2- To be able to maintain huge returns, hedge funds got involved in the process of creating some pretty nasty forms of securities. The largest group of these was the credit default obligations, or CDO’s, the instruments where they basically buy mortgages from banks and other lenders, and slice them up an turn them into a security, where the payments on the mortgages created the returns, as well as the trading of these things. This market created a huge demand for mortgages, and one of the reasons banks allowed all kinds of completely bogus mortgages was they knew they could sell them off into this resale market to be securitized, so they had basically no risk (most mortgages are sold off these days to the third market, especially commercial banks, they basically originate the loan, and then act as collecting agent for the payments). This helped fuel the bubble that happened, which as we all know, ended up tanking so much.</p>
<p>One of the big problems with these securities was that they were gambling using models that were bogus in of themselves, no one knew how to value these, including rating houses like moody’s, the ratings of the CDO’s were basically fiction…</p>
<p>-Problem 3- Thanks to deregulation in the late 90’s, commercial banks were allowed to lend money to hedge funds, something that before the repeal of Glass-Steagal was illegal. Some of these hedge funds were running borrowed money to invested capital of 60 or 70 to 1 (in other words, for every dollar invested, 60 or 70 bucks in the fund were borrowed). One of the reasons the government bailed all this out was because if they hadn’t, a lot of commercial banks would have gone under, they basically were stuck with hundreds of billions of dollars of worthless paper (the CDO’s used as collateral for the loans)…put it this way, when Lehman failed, despite what some try to say, there was a major collapse, commercial credit literally died, and it took a lot of money and work to unfreeze things, and that was small potatoes</p>
<p>Colleges put a lot of money in these funds, figuring they could increase their endowment and be able to do all kinds of grandiose things, like increase salaries and such,or aid, do capital improvement (like new gyms and so forth)…</p>
<p>Hedge funds are going to be around, I can guarantee that, you can’t put humpty dumpty together again. Hopefully someone will do the smart thing, and limit how much these funds can borrow and who can invest in them, but I am not holding my breath. Investing the old fashioned way is just too pokey and slow for many (and we, the people, bare part of that blame), and I don’t care who we elect or don’t elect, too much money and power is behind these people to see real reform IMO. </p>
<p>Sorry for the long post, this is a complicated topic, something I am not sure I know all the ins and outs, but what it does say is that when people get greedy, you get burned.</p>
<p>I like your post… musicprnt…</p>
<p><a href=“http://www.businessinsider.com/pgr-fires-don-chu-2010-11[/url]”>PGR FIRES DON CHU FOR CONNECTION TO INSIDER TRADING SCANDAL;
<p><a href=“http://www.businessinsider.com/the-insider-trading-scandal-is-now-so-huge-that-its-basically-irrelevant-2010-11[/url]”>The Insider-Trading Scandal Is Now so Huge That It's Basically Irrelevant;
<p>[A</a> kicked can, a long road (The Deal Magazine)](<a href=“http://www.thedeal.com/newsweekly/2010/a-kicked-can,-a-long-road.php]A”>http://www.thedeal.com/newsweekly/2010/a-kicked-can,-a-long-road.php)</p>
<p>Along with this issue of it getting harder and harder to find a hedge fund that isn’t crooked, endowments are faced with investors catching on to the fact that many private equity IPO’s are a horrible investment.</p>
<p><a href=“Bloomberg - Are you a robot?”>Bloomberg - Are you a robot?;
<p>Given that in many cases 80% of endowment money is tied up in private investments and hedge funds this could be a problem.</p>
<p>
</p>
<p>One of the basic problems facing higher education is that it does NOT break even. For instance, liberal arts colleges have the greatest difficulties in expanding, and this because they lose money on each student. Do not take my word for it, take a look at the words of Pamela Gann: <a href=“http://net.educause.edu/ir/library/pdf/ff0812s.pdf[/url]”>http://net.educause.edu/ir/library/pdf/ff0812s.pdf</a> . There is also plenty of material on the Williams site. Look for article by Morton Schapiro, the current president of Northwestern. It might not be apparent to many that full-pay students are ALSO heavily subsidized. Colleges that are seeking more full pay students–especially from abroad–are doing so to balance their growing costs of responsing to claims of diversity. Obviously, ones who loses money on each “item” cannot break-even with ciustomers who do not use "coupons.'</p>
<p>Despite the fact that tuition has grown faster than inflation, the sustainability of the model comes into question. Of course, one could track the inflation in faculty salaries that has grown even faster than tuition. The model will only function as long as universities and colleges are able to replenish their coffers via financial gains or … donations. Obviously, this will only exacerbate the differences between the “haves” and “havenots.” When one sees a small college such as Claremont McKenna (1,200 students) starting campaigns to raise $600,000,000 on the heels of mega millions private donations, one might start understanding the enormity of the problems in remaining a highly selective college. </p>
<p>As far as the analogies and imagery go, I think that sooner or later we might realize that the price of taking a family to a cafeteria will inch towards what the French Laundry gets from its clients. If the quality and experience is worth the cost remains entirely in the eye of the beholder. For higher education, time might have come to really decide if the ever increasing costs of higher education are justified, and if students truly need all the bells and whistles offered to them. Perhaps time has come for the next generations to savor the tart fruits of austerity and atten schools where the frills are rare but the education front and center. </p>
<p>Is a world where students spend most of their time learning and teachers teaching possible? Probably not until the entire system collapses under its own weight.</p>
<p>[“If</a> I Get Even A Whiff Of An Investigation, I Want To Get Out”](<a href=“http://www.businessinsider.com/if-i-get-even-a-whiff-of-an-investigation-im-out-2010-11]"If”>"If I Get Even a Whiff of an Investigation, I Want to Get Out")</p>
<p>Looks like investors are lining up at the withdrawal window. Last time this happened it flushed out guys like Madoff-be interesting to see if the same thing happens this time.</p>
<p>Very few schools (other then for profit style schools, like tech schools) get enough from tuition to break even on costs, and this applies to most private grade, middle and high schools, they all have endowments and fundraising to make up the difference (in other words, even leaving out financial aid, if you multiply the number of students x tuition,it will not break even with the costs of giving that education). That is why schools do fundraising and have endowments, that is their buffer for their operating costs not covered by tuition. </p>
<p>As far as hedge funds go, I won’t be surprised if they find all kinds of either illegal or questionable practices going on, whether it be insider trading, market timing (illegally trading around the time of the close,taking advantage of the slow time for a market to close), or using order flow to cause a negative effect (for example, selling off a lot of stock to trigger a market cascade, while shorting the stock in question), or things even I have never seen.Not to mention the fact that to this day, no one really knows how to value the CDO’s (the securities backed by mortgages), so there is still a lot of toxicity floating around out there.</p>
<p>The problem here is the lack of transparency in hedge funds. By law they don’t have the reporting requirements that standard funds like mutual funds do, they basically operate without much reporting or regulation at all, and with the amount of money that was put into these funds, it was like letting mom and dad gamble in Vegas with the mortgage money. Several years ago, in contrast, because of reporting rules several mutual funds who were engaging in illegal activity, like market timing, were found out and were penalized and it also led to preventing a pretty big mess.Madoff is another classic example, his firm was technically a private wealth management fund, so he could get away with a Ponzi scheme because he didn’t have to report anything. The fact that they were logging faux trading to back the concept of returns would have been easy to blow open if reported, because these days all trades are tracked, whether done otc or on an exchange, and reported trading (that basically Madoff’s sons made up), could be compared against the real deal.</p>
<p>The other big problem with hedge funds is that those running them have a major incentive to cheat. Because of US tax law as of the last major revision earlier this decade, hedge fund managers income is not treated as salary, their income is treated as a capital gains on the activity of the fund, so they have a direct stake in boosting the transactions of the fund…and given that they therefore don’t pay regular income taxes on what they make, rather they pay the 15% capital gains rate (another twist in the law, everything hedge fund managers pull out of the funds is considered long term, older then a year), so there is a lot more incentive to boost up output (if you get hit by progressive tax rates, on the other hand, it eventually becomes not worth it…). </p>
<p>It is the one thing that upsets me about much of the current financial regulation overhaul, that they aren’t stressing transparency. One of the reasons investment banks hit the skids was because of this. Back in the mid part of this decade, the heads of several big investment banks, Goldman among them, went to the SEC with a proposal. They argued that regulatory rules required that they maintain fairly huge liquid assets on hands to act as a contingency against losses (in effect an escrow account), and their argument was that having these large amounts sitting around was a drag on their bottom line…so they got the SEC (not a big deal for obvious reasons, given the philosophy of the SEC at the time) to agree to allow them to ‘free up’ these accounts, in the many billions of dollars, and in return they agreed, with the idea of trying to minimize the resulting risk of not having this money in escrow, to send to the SEC their previously private information on their financial activities, especially in trading…only problem was, the SEC never asked for it and the firms obviously didn’t volunteer it, and they both depleted these cash reserves and also were doing risky trading with the money…and crunch…</p>
<p>My personal take with hedge funds is the government has to finally decide to fish or cut bait. If hedge funds and private wealth management are the risky play thing of the very well off with money they can gamble, then they should let them operate like that, and forbid the funds from leveraging themselves (especially not from commercial banks) and not allow institutional funds to invest in them, either. Either that, or make them more general purpose funds, that institutional investors and such can invest in, and have reporting requirements and such on them. Having an entity operating the way they have, being major players taking huge risks with money to achieving high yields, and not regulating them or limiting exposure to critical financial sources (commercial banks, for example) is a recipe for disaster, one I don’t think they have fixed yet.</p>
<p>musicprnt - your comments about hedge funds are so inaccurate they really need some correction lest people believe this tripe…</p>
<p>You provide no evidence that hedge funds are involved in “illegal or questionable activities”</p>
<p>They do report to their LP’s, and their LP’s seem happy with that arrangement. Note that no hedge fund since LTCM (late 90’s) has been accused of posing any kind of systemic risk. </p>
<p>Your Madoff comment does not make sense…it was a failure of the SEC to adequately investigate suspected transgressions, and the fact that Madoff was acting as investment advisor AND custodian that allowed him to ponzi his clients. You say that “he didn’t have to report anything”. Patently wrong. The problem was he lied in his reports and their wasn’t an independent custodian to verify them. </p>
<p>You state that hedge funds have a major incentive to cheat. The carried interest portion of their income is indeed treated as capital gains (a travesty in my view)…which provides incentive to “boost up output”. I am really not sure what that means, but I think your suggestion is that since their carry is treated as capital gains and not ordinary income they are tempted to cheat? A novel, if unproven, theory. I would think that if they were taxed at ordinary income levels they would be more tempted to cheat since they would have less…?</p>
<p>Again, while institutions lost a ton of money in hedge funds in the financial crisis, no one has suggested that they posed any systemic risk. Your lumping of private wealth management firms into this mix is laughable. (and no, I don’t work for or have money invested in any hedge funds…).</p>
<p>Balto-
Before calling my post tripe, I would recommend you do some reading on the financial markets and what role hedge funds play in them. These are no longer funds with a small group of limited partners of high net wealth seeking larger returns on their money. As noted in the original thread and in my description of them, hedge funds have become major players in the markets, and they aren’t just for the uber rich. Institutional investors (pension funds, 401k funds, endowments) have put their money into these at a rapid pace, hedge funds were on track to be larger then traditional mutual funds not too long ago (I haven’t seen any updated stats), likewise investment advisors have been putting money under their charge into these funds, they have become more general purpose investments then the playing field of the few as they once were. Regulation has not caught up to this fact yet, they don’t have the reporting rules mutual funds for example do, and that is problematic.</p>
<p>As far as hedge funds not being a source of systemic risk since long term capital went under, that is not a statement of fact, it is downright wrong. The current financial mess is proof of that, the one that required the TARP bailout and the like, and hedge funds were right in the middle of that (despite what the tea party types and Glenn Beck claim, the financial crisis was not cause strictly by fannie mae and freddie mac lending to inner city poor people and the like, nor was it about failed mortgages hitting the banks who issues them entirely). </p>
<p>First of all, are you aware of why Bear Stearns went under and why the fed engineered the sale of it, along with some umpteen billions of dollars in fed loans? Bear Stearns went under because several of their hedge funds failed after the bubble with mortgages and more specifically, the securitized mortgage debt instruments that represented sliced and diced mortgages. If what you are saying is true, then no one should have cared, but therein lies the rub. Among other things, hedge funds don’t have any rules about leveraging (i.e borrowing money), and at Bear’s funds as at other places, they were heavily leveraged, as much as 65 to 1 borrowed/under investment. This is quite common,and where this is even worse is this money was borrowed from commercial banks, which thanks to people like Phil Gramm was allowed to happen (they repealed Glass-Steagal in 1999, which prevented that kind of transaction). When those hedge funds collapsed (primarily because Goldman through its own hedge funds decided that the gig was up on the mortgage security bubbles, got out, which started the slide), banks were left with 10’s of billions of dollars in crap instruments that were collateral for the borrowing…basically worthless. Had they not engineered the ‘sale’ of Bear (with a lot of fed money thrown in to cover the debts), several banks probably would have gone under.</p>
<p>Want real proof of systemic risk? Lehman bros had hedge funds similarly hammered by the CDO mess, and it ended up taking them down. Lehman bros was ‘allowed to fail’, and the result was near global financial paralysis. After Lehman went down, the Libor spread between the cost of borrowing and the cost banks would lend at went to 7.5 points, when in normal times it is 0.5%. The net effect was that commercial credit, which is the lifeblood of most businesses, literally froze, and it took some major work by the fed and the other central banks to unfreeze it (and it still hasn’t totally recovered). </p>
<p>Hedge funds were prime consumers of the CDO’s, and in one sense they also helped drive the collapse of mortgages. Contrary to images in “Its a Wonderful Life” most mortgages these days are not held by the banks that originate them. They are sold off into the third market, and the demand for CDO’s (to a large extent by hedge funds) was actually helping drive the idiotic mortgage lending practices. A friend of mine works for one of the large commercial banks and he said they were constantly getting phone calls and such from the people creating these CDO’s, basically telling them that any mortgage they wrote they would gladly buy, that there was in effect more demand for mortgages to securitize then there were mortgages being written, and that helped drive the housing mess we are seeing.</p>
<p>The other problem that is systemic with hedge funds,besides the debt borrowing and the fact that a lot of institutional money has ended up there, is the way they trade. Hedge funds don’t operate like traditional mutual and other funds, which tend to trade huge portfolios that tend to be long term investments, and they tend to rebalance their portfolios over long periods. Hedge funds operate on financial models, algorithmic trading based in complicated models that basically hedge risk while looking for high level returns using a complicated mix of instruments, including derivatives, forex, futures, equities and the like. This is computer based portfolio trading, where the systems constantly monitor index values and prices and rapidly shift in and out of positions. With modern markets being based in rapid trading (to give everyone an idea, 10 years ago the gold standard of getting a trade in and out was .1 seconds [100 miliseconds]), today the gold standard is sub 1 millisecond (.001 seconds) that means this kind of trading can and does happen rapidly. The problem is with the size of hedge funds these days, their kind of trading can cause a rapid meltdown and trigger huge market swings, as happened earlier this year…hedge funds obviously aren’t the only ones doing this, it is common across the street, but because of their size and the way they trade, they are a major risk IMO (and not just myself, lot of other people have written about this).</p>
<p>As far as claiming that hedge funds have done anything illegal, I never said they did, I said it wouldn’t surprise me if they had. The way hedge funds operate, with the pressure to return huge returns quickly, the temptation is there all the time, and given that hedge funds operate without the reporting requirements mutual funds have, it is a lot easier to cheat if in fact they have. Don’t believe me? Several years ago, several big mutual funds (who do have to report in their transactions) were caught in their trading doing things like market timing (which is illegal) and also using customer account money to cover their own trading…and that was with something that is reported in to regulators. Please read what I posted before assuming I claimed any knowledge of illegal activity, I didn’t.</p>
<p>As far as the 15% tax rate on hedge fund managers income being an inducement to cheat, my belief is based on past behavior. Having a 15% tax rate is a serious inducement to go into hedge fund management, and history has shown that when you have a wild west kind of environment (high returns with an idiotically low tax rate) it tends to attract more then its fair share of greedy, get rich quick types whose whole MO seems to be “I am going to get mine, no matter the method”. This happened in the 19th century, where in the laissez faire, do as you will markets, it bred a lot of outright fraud, inducing people like Fisk, Gould, Brady and the like, or Andrew Carnegie who made his first fortune selling railroad bonds, fueled by huge government give aways, that were for all intents and purposes scams (Carnegie himself knew that)…doesn’t mean all people running hedge funds are crooked or that they all are dirty, what I am saying is that kind of environment tends to attract more then their fair share of those who think anything goes, that’s all. Note again I am not disparaging any person or the whole industry, that is my own observation based on both history and personal experience, and is why I wouldn’t be surprised if they find cheating in hedge funds, that’s all.</p>
<p>As far as Madoff goes, I am not a total expert on it, but I know something of both the firm and the way it operated. From what I was told, by a senior regulatory officer of another financial company, Madoff operated in such a way that they didn’t have to routinely report transactions, similar to the way hedge funds operate (could the person have been wrong? Possibly, but this is an experienced person). The SEC did fail to investigate Madoff, but from my understanding this wasn’t routine surveillance, that they failed to act after people complained, big difference. If Madoff had been regulated with regular reporting requirements, it would have raised red flags a long time ago, but again, my understanding is that the only red flags that were raised were not from within the SEC, but rather outside complaints. With mutual funds, they run trading activity and analyze it compared to broader market activity and see if the results gybe (it is why they snagged the Mutual Funds for market timing); if Madoff had routinely reported transactions, it would have raised red flags,among things that the trading he was claiming literally didn’t exist.
All Financial firms have to keep transactions, Madoff had to create fictitious trades to cover their activity, but as far as I know they weren’t reported (firms under SEC regs have to keep stuff for 7 years; there is also a requirement that shorter period transactions, like 6 months were, have to be available within a couple of days, past that it usually involves archived data that takes time to find). I used Madoff of an example of what happens when you are lightly regulated. BTW, Madoff acting in both capacities had nothing to do with regulation;if he hadn’t of acted as custodian, then whoever did act would see what he was doing, and report it, but that wasn’t regulatory, in either case from what I am led to believe Madoff’s firm operated like hedge funds do, with very little regulation. </p>
<p>The reason I brought up private wealth management funds was because they, too, are not regulated. I am not talking about private wealth management services overall, I am talking about the funds they manage directly. Like hedge funds, because they are the realm of the very wealthiest, they are lightly regulated because the thought is they don’t impact the overall economic system…the problem being that these funds from what I am led to believe have started mirroring hedge funds, if not running them themselves, with the same issues; they aren’t the players hedge funds are, but they still have no reporting requirements, and that is the problem. </p>
<p>And this isn’t coming from someone watching the tv news, I have worked in the industry for 25 years in the trading end of things, in exchanges and off exchange trading, and have more then a passing familiarity with the industry and what goes on. Yeah, I have heard the populist nonsense spouted by tea party people specifically, that it was all the banks being forced by ‘liberals’ to give mortgages to people in the inner cities and similar real tripe, that it was all fannie mae and freddie mac, and that simply isn’t true.I know people who work at hedge funds, many of them are clients of firms I have worked for, so I am not speaking as someone out to get evil wall street, like ma and pa tea party types, nor am I seeking to demonize anyone or anything, I was simply pointing out that hedge funds like other financial firms have been allowed to grow into huge parts of the financial system and have been allowed to operate in a way that creates gigantic risk, risks that as has happened can take down the financial system. Investment banks, who complained about onerous reserve requirements against risky trading, were allowed to free up that money but were not asked to report their activity (part of the deal to free up the funds)…the problem isn’t hedge funds per se, I have no problems with them or with derivatives trading or any kind of trading, what I have a problem with is allowing them to operate with money that does affect the overall financial system and doing so under a veil of secrecy and lack of regulation,that is the recipe for high levels of risk taking and also potentially to create an environment where cheating is rampant…when hedge funds can borrow money at huge levels of leveraging (they make the 1920’s look good, least then you still had to have 10% in your own money when trading on margin, today it is 50%) from commercial banks, when they can take in pension funds and 401k money and the like without oversight, it worries me because I don’t believe businesses always behave rationally, and that lack of transparency has shown itself to be one of the major factors when irrational or illegal behavior happens. When Allen Greenspan sat in front of congress with his head in his hands and said he was “flabbergasted” by the behavior that led to the financial collapse, hedge funds were a not small part of that comment. </p>
<p>BTW, it is very easy to claim something as fact, I laid out in this and other posts what I know based on my experience and reading (both the Economist and the Wall St Journal have done some great pieces on this topic), I didn’t knee jerk come to the conclusions I drew, this is based on long experience and knowledge. You say you have nothing to do with hedge funds, yet you claim expertise? From what? Just naysaying what someone else says is not fact or discourse…I have laid out my knowledge and where I got it, where did you get yours from?</p>
<p>Musicprnt, I love your post. I have also traded on an exchange and off exchange, and what you write looks pretty accurate to me for the most part.</p>
<p>There are quite a few hedge funds, so i would say that many are not as sophisticated as you wrote. Some are more…seat of the pants type operations.</p>
<p>And not to quibble too much, because like I said, I love what you wrote, but which firms trade under 1 mls? I guess you can scalp a trade that fast…but that is pretty damn fast. I’ m not sure a firm can trade that fast. You can’t trade on multiple exchanges that fast…</p>
<p>There is a speed race where microns make a difference though.</p>
<p>I would just add that it wouldn’t surprise me if plenty of firms were engaged in insider trading. Used to see a lot of it on the floor. ;)</p>
<p>Edit: and I agree about the FNM, FRE, inner city comments. Ignorance…</p>
<p>Well stated music-one thing I would add is that there is a strong belief that when Lehman went down it was pushed and pushed hard by several hedge funds that were betting against Lehman. This isn’t to say that Lehman didn’t create its own problems but sensing blood in the waters seems to be the stock and trade of hedge funds.
If you look at a fund like Soros he has made his fortune by taking down currencies-something I would call systematic risk.</p>
<p>dstark-
A traditional floor based exchange would not trade in the 1 msec range, for obvious reasons, but floor based exchanges are basically dinosaurs at this point (at the NYSE, much of their order flow trades in the so called NYSE express system, which is the old ARCA ECN trading platform they bought years ago). </p>
<p>But trading platforms out there exist that are sub 1 msec. Now to be fair, that is time measured portal to portal (in other words, from the time they get the order, execute it and it gets to the portal going out. You still have latency from the user sitting at their computer to get to the system, plus the return trip). The speed is so fast that you now have flash orders, where they send an order and basically a cancel right after it (I mean Msecs after), which allows them to rapidly hit orders on a systems book and then cancel the remainder (it is kind of like a super IOC, immediate or cancel order), which also stops the order from going on the systems books. So you have hyper fast algorithmic systems shuttling orders rapidly to high velocity trading systems (not all systems are so fast, I believe NASD is around 5 msec these days, NYSE express was 10 last I heard, but many of the dark pool trading platforms are running sub msec times). </p>
<p>Funny you mentioned insider trading on the floor, years ago I worked at an exchange that was automating, they had built their first electronic system to replace the paper book…and there was massive resistance. At the time they told us it was because the clerks were worried about losing jobs, but no one believed that, a lot of it was floor specialists, who didn’t want an audit trail of what they were doing…some years later specialists got nailed for front running (basically trading for their accounts in front of a customer order,a big no no). I also saw things like market makers changing their public quote to get someone on an electronic off exchange system to bring down their offer price, the MM wacking the sell at the lower price then raising their public offer to where it had been…one thing I learned in all those years in this industry, while most of what goes on is legitimate and above board, there is always a certain amount of skullduggery going on, some of it legal but shadowy, other parts on the line of being illegal, other parts being outright gaming the system…</p>
<p>One of my arguments with regulators over the years, having had to deal with them, is that the biggest key is getting the information out there, to not allow for hidden trading like what hedge funds do. When information is disseminated it is a lot easier to stop the game playing and the like and catch those who don’t want to play by the rules. More importantly, rather then putting in rules that remind me of when I was in grade school and they made everyone suffer for the actions of the few; in the current situation, it is banning certain kinds of activity rather then making sure it is public.</p>
<p>SM, yeah, I had heard that, not to mention that some hedge funds and other financial houses had huge positions short on Lehman that helped trigger an avalanche…what worries me about the financial system is so many of the safeguards have been blown away, Glass-Steagal being the biggest one. It is all so interconnected that very little can be said to not have systemic risk, given the scope of what these guys are playing with. People’s e-trade accounts have little impact (other then to themselves, of course), but everything else is tied together, so when one piece goes down it takes a lot with it.</p>
<p>Musicprnt, great post.</p>