Hedge Funds and Financial Market Failures

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

The public has been left with the impression that hedge funds are
finished after the LTCM debacle.  The fact is that in 2001, a record
$144 billion of new money went into hedge funds, up 73% from $83 billion
in 2000.  Total hedge fund assets rose 38% in 2001 to $563 billion.

Hedge funds are loosely regulated investment partnerships that cater to
the wealthy - so-called qualified investors of high networth (mininum
$2-5 million).  Though they are essentially high stake bets in global
stocks, bonds, interest rates, currencies, distressed debts,
electricity, communication capacities, future climate, basic comodities
and what have you, they are marketed as risk maanagement hedges, aiming
to profit from volatilty that their counterparties want to avoid.  It is
the New Speak in the Brave New World Of finance capitalism - taking more
risk to  manage risk, or risk losing your head to reduce risk of losing
your hand.  The game now is sophisticated eneough to have become risking
losing the system's head to reduce risk of losing your hand. Until a
systemic breakdown, hedge funds consistently outperform the broader
market. Hennesee Hedge Fund Index rose 3.98%, after fees while S&P500
index fell 11.89% and the Morgan Stanley  Europe Australia, Far East
index fell 22.5%.

The overall picture is that the wealthy made out like bandits when
regulated pension funds (where the savings of poor working souls are
trapped) lost money.  There is evidence that what the WSJ celeibrates
as  "mass capitalism" is a balckhole of financial loss, and not all of
which is related to a slowing economy.  A good part is direct transfer
from the equity and commodities markets to the pockets of hedge fund
investors.  Structured finance, far from performing a risk management
function, is a legalized market failure that transfers wealth from the
passive investing public to the barracudas finance professionals.  The
giant sucking sound that Ross Perot fears did not come from Mexico, but
from the hired guns of "qualified" investors.

Henry C.K. Liu