Monday, January 07, 2008

What's Behind the Hedge?

IMHO, the trend toward private equity firms and hedge funds is extremely dangerous to our economy. A hedge fund further increases the distance between the population at large and and ownership.

Most hedge funds are complex mixes of stocks, short positions and derivatives. The goal of a hedge fund is to have a complex mix of derivatives to eliminate risk. Note the goal of the hedge fund is risk reduction and not production.

Hedge funds have very little concern for production. The quality of what gets produced doesn't even enter the thinking. They are about what the charts say. Unfortunately, it is very easy for hedge funds to fall into the dark side of finance. As the funds gain ownership, they are likely to engage in manipulating the charts.

Patrick Byrne put together an interesting site called Deep Capture, the Movie that explores what happens as these hedge funds capture ownership. There is reason to believe that manipulation is going on. For example, you will find hedge funds taking massive short positions in a stock followed a week later by a class action investor lawsuit.

There also seems to be patterns where a hedgefund will take a short position followed by a reporter with connections to the hedgefund doing attack pieces on the company shorted.

The complex short positions of hedgefunds means that they will actually have voting rights in a company that is not proportional to the risks shared by the rest of the investors.

There appears to be more manipulation going in the stock market than at any time since the fabled manipulations by Joseph P. Kennedy (1888 – 1969) that gave him the capital to buy his son the presidency and his chidren the Democratic Party.

The idea that there should be a different type of investment tool for the rich that allows them to externalize risks onto the middle class is absurd.

I wish Mr. Byrne well in his fight against the corruption of Wall Street. Unfortunately, he has been marginalized by supporting diversity in the education market. So, he will continue to get that big ugly snear that distinguishes the highly biased liberal press.

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