Re: [Pen-l] Hedge funds, speculation and capitalism

["Jim Devine" <jdevine03@xxxxxxxxx>]

http://www.marxist.com/hedge-funds-speculation-and-capitalism.htm

The author (Mick Brooks) should make it clearer that "Hedge Funds" are
not really in the business of "hedging" (where the latter refers to
the way a farmer tries to avoid the downside risk that the crop will
be worth less in the fall). Instead, "Hedge Funds" are speculating, by
which I mean the taking of risks in order to earn a higher return. A
true hedger, on the other hand, accepts a lower average return to
avoid risk. (If the farmer "locks in" a price for some of the crop,
that requires paying for a special contract. The farmer is often seen
as minimizing risk at the same time that a speculator is taking on
risk, so that the speculator is in effect providing insurance to the
farmer. But the farmer has to pay a price for the insurance.)

"Hedge Funds" get higher returns by leveraging (unless the risk-taking
fails). True headgers do not want to leverage, because that's risky.
(They may not have much choice, however, since repeated cash-flow
problems lead to what Bob Pollin calls "necessitous borrowing" and
thus leveraging.)
-- 
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.
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