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• Monday, August 20, 2007 08:05 PM

  Are Hedge Funds just another version of the investment pools of the 1920's?

  So where is the hedging going in hedge funds? In just about every article I read about hedge funds, there is a lot of borrowing going on. No one seems to talk much about the purchase of one investment and offsetting the risk of the first investment with another investment that behaves differently. Secret Hedge Fund Partners may raise $1 billion from the Podunk County Public Employee Pension Fund as well as other pension funds, and then use this $1 billion as a base to borrow another $4 billion from First Leverage National Bank, which is leading a syndicate to parcel out participations in the loan to the Slick City University Pension Fund, the Daddy Warbucks Family Trust and other supposedly knowledgeable investors. So what is Secret Hedge Fund Partners investing its money in? I don't think anyone knows up front. It sounds like the old blind pools of the 1920's. And you, as a resident of Podunk County, will likely never know.

  What if the whole business goes really bad? If you are a Podunk County resident, maybe your property taxes go up or your library service gets cut as the county looks for solutions to its investment losses. If you a student at Slick City University, maybe your tuition goes up even more, as the university tries to offset its investment losses. If you are a beneficiary of the Daddy Warbucks Family Trust, maybe you have to take Junior out of private school and put him into a public school. And if First Leverage National Bank is not able to sell all of its loan participations, maybe it has to cut its dividend and its own share price goes down. If you happen to own 100 shares of First Leverage in your IRA account, First Leverage's loss is all of a sudden your loss too.

  Now that the proverbial horse is out of the barn, maybe the financial regulators will be able to come up with a way to reign in this cowboy capitalism, without doing a lot of damage to the economy, if WE the people are lucky. If we are not so lucky, maybe we are bound to repeat the experience of the 1930's. Unfortunately, this time around the lowly dime won't buy you very much.

  All of these problems may have started with a few subprime loans going bad. But it is clear to me, that the problem is much greater than that.

  If the Almighty did not look after his Chosen People during World War II, when six million went to their deaths, chances are, He will not look after your IRA either.

  —Anonymous
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