Credibility Shaken, Hedge Funds Are Punished by Investors

CNBC ^ | 2/17/2011 | Jesse Eisinger

[FromLori]

Now for a bit of good news: Rationality may be breaking out in the hedge fund world.

Investors are punishing funds that have engaged in questionable behavior and balking at ever-escalating fees. Regulators are showing uncharacteristic backbone, insisting that they will not merely fight the last war when it comes to new rules.

That’s a big change from the old way of doing business in hedge fund land, which was to reward failure and ignore problems.

Think back to Long-Term Capital Management. The multibillion-dollar hedge fund imploded spectacularly in 1998, presaging much of the larger financial crisis a decade later. The fund’s implosion was caused by excessive leverage and gigantic derivatives positions.

The Federal Reserve Bank of New York engineered a Wall Street bailout and, in the immediate aftermath, regulators and investors professed a desire for change. Yet John W. Meriwether, the impresario who had blown up L.T.C.M., soon gathered billions in new assets — only to blow up again. Regulators watched passively as hedge funds grew meteorically without close monitoring.

Now after the financial collapse of 2007 to 2008, changes are dribbling in. It’s all the more surprising since hedge funds were not a cause of the crisis. Banks, especially Wall Street firms, get the credit for that. Plenty of hedge funds went out of business, but almost none of them were systemically important enough to stoke fears of a wider panic.

[FromLori]

Note this unless of course the Fed. thinks they are connected enough then they get bailed out...

"Last week, the Federal Reserve issued its definitions of what a “significant nonbank financial institution” will be, drawing the lines broadly enough to include big hedge funds. The Fed, properly, has judged institutions’ significance based, in part, on how interconnected they are: how many trades they do, how many counterparties they have, how much they have borrowed."

[Attention Surplus Disorder]

Is this supposedly written about some financial market that exists on planet earth??

This has been by far the easiest market to trade (for algo-driven computers, that is, not necessarily for humans) in many years, totally leptokurtotic (look it up) one-way bull market. Not as dramatic as ‘99 nor even ‘03 but entirely monotonic, all the way bullish, never have had to wait more than 3 days (tops!) to recover from the worst buy-in point imaginable. Hedge funds have probably turned in very creditable performance over the last *calendar* year or so.

What are they talking about LTCM for? Nobody gives a crap about that, it’s old news. Hedge funds and large banks know there is absolutely no enforcement of *any* SEC regulation, and even if there is, it will amount to no more than 5% of the funds ripped off by any means these goons can come up with, no matter how sleazy.

I don’t get what stock market this article is talking about. There shouldn’t be anyone unhappy about the market’s performance; especially in light of the condition of the rest of the economy, it’s been stellar.

[GnuHere]

The Amish hedge funds are looking shaky, too:

http://www.newser.com/story/112267/amish-man-accused-of-running-ponzi-scheme.html

Just when I was gonna take my buggy over to the office to see how things were going...

[FromLori]

The part of this article that is relevant is the fact that the connected won’t be allowed to fail. The Fed. is again picking the winners and losers. That’s not capitalism.