March 15, 2007
I'd like to propose that the SEC do away completely with hedge funds and the "pooled" investment structure of hedge funds.
1. Hedge funds have no control of people's money once they are given the funds. Actually, they have one control and only one: By loss.
That's not a viable investment structure. It's not a viable structure for anything. Not like a traditional business that can manufacture and sell products and be beneficial to the interwoven fabric of business, progression of necessary things, employment, health care, etc.
2. Remember the "daytraders" of the late 1990s? How they all went broke and blew up their trading accounts? These are the same ones who are running the 10,000+/- hedge funds today.
And, you know what they're doing with the $1.4 - $1.? trillion committed to them for "safe keeping?" Daytrading with it
If you think otherwise, you're in delusion, folks.
3. The daily achievement-oriented goals for single manager hedge funds do NOT add up to profitability. Here's why.
Put yourself in a hedge fund manager's seat for a second. Think it over. The more MONEY a hedge fund manager can GET under management, the higher his paycheck goes. End of story.
Consequently, the name of the game in hedge funds today is NOT doing what is necessary to profit (with the money YOU give them) -- no, no, the main goal is to simply get MORE money under management because that is what makes hedge fund managers RICH -- MORE money - not higher returns.
Look at it this: A HF manager who makes 40% with $1mln under management gets 20% of $400k (profit) that amounts to $80,000. (Plus the 2% management fee = another $20k) totalling $100,000.
Whoopdeedoo... car salesmen make THAT much. No big deal.
However, take that same HF manager and give him/her $10 billion under management -- ah... now the picture changes A LOT.
The manager only needs to make 5% ($500mln) profit and his/her paycheck is 20% of that, equaling $100,000,000. Stack in another 2% management fee (2% of $10bln = $200mln) and our illustrious HF manager's paycheck for the year is $300,000,000.
Now, ask yourself, which is more effecient? Which did more for the investors? For business, people and life in general?
$100,000 vs $300,000,000.
Which pay scale for your efforts would YOU choose?
Do you see any conflict of interest?
This is what I see: Hedge funds are a sick, sick financial structure that should be done away with entirely.
People who have money and those who do not need to take the initiative to educate themselves in and about the markets, and about sound money management principles for themselves if they want to become or remain a productive in life. People need to apply their interests to help benefit others -- when value is created, and marketed for a good price, riches are the result.
I cannot think of a more horrid investment and trading structure than forking over to daytraders $1.4 trillion to day trade with in the markets.
It equals 100% risk and 100% exposure to a single purpose: To make the daytrader wealthy at the risk of losing YOUR money.
Think it over, folks.
Dismantle "hedge funds" completely. Do away with them. Do not stoke them further with additional pension fund and other institutional money. You're begging for major disasters if you continue to do so.
My mother used to say, "Be careful what you wish for, because you'll get it."
Investors, traders and the markets will be far better off and a better place when hedge funds are stopped from doing business as such: And the world will become more productive and efficient, practically-speaking.