Hedge funds as whipping boys

Like a hound dog thrown off the scent, Henry Waxman of the House Committee on Oversight and Government Reform is busy barking at hedge funds and the hedge fund industry while the real criminals escape. Hedge funds didn’t cause the financial crisis the world is facing. Making them report their holdings, their strategies, and their wallpaper patterns won’t cure this crisis or prevent another one.

I dislike hedge funds as a class, although there are surely some good ones. Many gamble. These funds arise and disappear with startling rapidity as they gamble and lose. They sell themselves as providing strategies unobtainable elsewhere and providing diversification benefits. But new strategies generated by poring over past financial relations have a great track record at failing miserably after a short day in the sun. I have the greatest suspicion of these outfits or anyone who claims to have the key to investment riches. I would never risk a dime in outfits with management fee schedules as steep as theirs are. A standard fee is a whopping 2% of net assets per year and 20% of the price appreciation, if any. To top it off, they employ far more leverage than is safe. Many have imploded as the markets shred their strategies.

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3:28 am on November 14, 2008