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Saturday night poker night is about to get a lot more interesting ...
September 22, 2008 2:40 AM   Subscribe

Hedge Funds employ many different strategies to make money. There are long/short funds, event driven funds, emerging markets funds [.pdf], funds looking to profit from global macroeconomic trends and a large number of funds employing a wide range of arbitrage techniques to make money.

But these techniques are the tried and the true. As both assets under management and market turmoil have grown significantly, hedge funds are rapidly branching out into domains far, far detached from finance: art, litigation funding and now even poker.
posted by Mutant (44 comments total) 17 users marked this as a favorite

 
I'm sad to see that fee-splitting has now become an actual business, even though my ethics professor predicted that this would happen sooner or later. But I can't say I'm surprised that the source of this bad behavior is hedge funds, which appear to be managed by all of the biggest jackasses with whom I went to college.

From what I can gather, hedge funds operate by aggressively screwing the economy for the benefit of their investors, who are all shockingly wealthy. Seems like a "first against the wall when the revolution comes" sort of career path to me.
posted by 1adam12 at 3:18 AM on September 22, 2008 [3 favorites]


Wouldn't it make more sense to just cut out the middlemen and play poker? Just bet up the pot until it's "too big to fail" and rake in the government chips.
posted by three blind mice at 3:24 AM on September 22, 2008 [6 favorites]


Like the teenage stoners who want to make everything into a bong, it seems we must now make everything into a derivative. Now, if only I could power my portfolio with snark, I could retire to that island right now ...
posted by scruss at 4:05 AM on September 22, 2008 [1 favorite]


now even poker

It's been gambling all along.

The fund will use several strategies, including buying work direct from a group of 10 established contemporary artists to sell on, buying privately from distressed sellers and trading impressionist and post-impressionist works.


Can only imagine what a bizarre impact this will have on the art market.

But some wealthy investors are starting to dabble in lawsuit investment, bankrolling some or all of the heavy upfront costs in return for a share of the damages in the event of a win.

whoa. That seems like it would impact the outcome of legal cases.

Learned a new word, champerty.

Profiting from other people's lawsuits, a practice known as champerty, is illegal in some jurisdictions and risks accusations of ambulance-chasing, but Juridica is concentrating on backing business plaintiffs, where the practice is better established and more accepted.

Strange vested interests.
posted by nickyskye at 4:05 AM on September 22, 2008 [1 favorite]


This whole system doesn't favor rational decision-making. It favors fads, superstitions, and mythology. Sometimes people get rich quickly on this mumbo-jumbo and it clouds their thoughts. This line from the "now even poker" link:
You make stupid mistakes, ridiculous, rash decisions. You lose it when you’re drunk.
explains the current financial crisis as well as anything I've heard.
posted by twoleftfeet at 4:09 AM on September 22, 2008


Nothing funner than watching a bunch of cockbites pontificate about a business they know nothing about.

It would seem H. Roark that the people who run and work for these businesses no nothing about them either.

What I see is a whole bunch of financial friggin' geniuses running to mommy government asking for money to make the rent.

I, for one, am unimpressed.
posted by three blind mice at 4:25 AM on September 22, 2008


This reminded me of a pitch someone gave my wife recently about 'life settlements'. Something that I'd never heard of but is apparently driven by hedge funds.
posted by aperture_priority at 4:25 AM on September 22, 2008


three blind mice, I disagree. There are literally tens of thousands of hedge funds out there, many of them suffering redemptions, blowups etc. With the possible exception of LTCM 10 years ago (in which no federal money was actually spent) there has never been a hedge fund that blew up and asked the govt for money.

Do not confuse hedge funds with the investment banks or other leveraged financial institutions; they are completely different. This hat-in-hand crap from the banks is a tragedy, and that it is all being orchestrated from alumni (Paulson was from GS) makes it worse. If we are going to spend $700billion and get into the banking business, just start a new federal bank and let the bad ones fail.
posted by H. Roark at 4:41 AM on September 22, 2008 [2 favorites]


Hedge Funds = Veblen Good
posted by JPD at 4:57 AM on September 22, 2008 [1 favorite]


nickyskye -- "It's been gambling all along."

Yeh, but the thing that struck me about that article is they're applying quantitative risk management techniques to gambling and even going so far as to run a training camp in Serbia. Their marketing spiel is that they can increase odds in their favour by 2% to 3%.

I'm not a poker player by any stretch (although I know there are some very active players here on MeFi) but it seems to me that if you can 1) shift the odds in your direction by that apparently small magnitude, and 2) play a large number of hands the fund could generate significant profits.

By the way, the article mentions a guy playing 50K hands a month, which is either a shitload of poker playing or maybe 1,666 hands a day seven days a week, depending upon one's comfort level with maths. I think I'd lose my mind, but some folks think that way about finance - something I can talk about 24x7.


"Can only imagine what a bizarre impact this will have on the art market."

Yeh, I'm curious as well, but the art world has always had a strange dynamic to funding. I lived in New York (Lower East Side) during the 80's and owned / ran two art galleries. While doing shows and stuff I acquired lots of art from people whose work I liked.

I was steadily acquiring work from one of the urban primitive painters (oh the labels used to classify) active in The East Village art scene at the time when he told me that someone (I won't name the person) from one of MOMA's Acquisitions Committees was quietly purchasing pieces from him as well.

Now this might come as a surprise, but some artists are a little arrogant, so I certainly didn't know if it was true at the time. However I did like to think of it as a rather happy coincidence, and justification on some level for my taste in painters. I really didn't think any deeper than that and yet maybe fifteen years later - sure enough as some folks who are far more familiar with these things might tell you - I'll be damned if one of his pieces wasn't acquired by MOMA. Not that I'm suggesting any conflict of interest, mind you, after all these decisions are taken by a committee. But there you go.

So seems like with the funds calling (some of) the shots, we'll may see lots more crappy art achieving truly outrageous prices. Until, at least, museum attendance craters and some bright bulbs figure out why.
posted by Mutant at 5:11 AM on September 22, 2008 [1 favorite]


Hedge funds are a just a form of white-collar crime.

Goldman Sachs and Morgan Stanley just declared bankruptcy. Or rather, they were "allowed" by the Fed to become "bank holding companies"--it amounts to the same thing. This is what Paulson's plan was all about: he knew damn well Goldman and Morgan were in just as bad shape as were Lehman and Bear.

The entire investment banking industry just went down like the Titanic. Paulson's trillion dollar request to "buy" bad debt is just a way for Wall Street to steal the furniture on their way out of the building.
posted by ornate insect at 5:24 AM on September 22, 2008


I found a little hard bound book sitting in the trash near Wall Street. It's still around here somewhere. It was about 75 pages long and each chapter explained with graphs and formulas a different type of derivative. The fun part was the price of the book printed on the cover, $900.

I showed it to my friend, a manging director of Morgan Stanley. Without opening it he guessed the year of publication, I think it was around 1986. He said that was the year the cat first got out of the bag.
posted by StickyCarpet at 5:26 AM on September 22, 2008 [1 favorite]


three blind mice, I disagree.

Point well taken H. Roarke. Thank you.

But it's fine print. It seems fairly transparent that banks are acting as proxies for the whole rotten business. Until recently, they were the only ones allowed to nose up to the discount window and all of this leverage came through that fulcrum.

It seems obvious that rather than being innovative tools, hedge funds exploited fundamental weaknesses in the financial system, gorged themselves full on transactional costs, destroyed the fundamental foundations and now the house is crashing unless the Nanny State steps in to shore it up with taxpayer money.
posted by three blind mice at 5:31 AM on September 22, 2008


The conversion of the financial system from wealth generation to gambling (aka wealth extraction) continues apace, to the point that they're even backing gambling itself. From that last article:

After one wipe-out three years ago, he was offered an alternative way to get back in the game. While Tabatabai had been working at graduating both from Reading University (with a law degree) and from the Ladbrokes poker site, two fellow Ladbrokes players had spotted the similarities that online poker shared with financial trading.

They're right. A large fraction of the modern financial system doesn't create new wealth anymore. It's not a factory that makes wealth; it's a casino that extracts it from the economy, while giving little to nothing back. You can see it most clearly with the idea of backing gambling as an "investment", but the system is full of ideas like these. A gambler creates no wealth, he just takes it from other players. Likewise, most hedge funds create nothing: they just take it from everyone else in the economy.

Only the instability at the core of the system caused by fake money and constant intervention makes it possible for so many of these businesses to thrive. In a sane system, arbitrage opportunities would be somewhat unusual, instead of endemic. There's always room for speculation in any economy, and it's broadly accepted that it provides a stabilizing force at the edges. But it thrives on instability, and instability is what the Fed provides, by trying so desperately to provide stability.

It's now more profitable to manipulate other people's wealth than it is to generate your own, so that's where all the best and brightest minds are going -- into taking whatever they can out of the economy, at your expense. Most of these are zero-sum games, and it's the average citizens that are on the losing side.

Oh, and the Treasury.
posted by Malor at 5:53 AM on September 22, 2008 [8 favorites]


A large fraction of the modern financial system doesn't create new wealth anymore.

Reflected in the fact that, as a point of pride, the higher up you get as an investment banker, the less you actually show up at work.
posted by StickyCarpet at 6:14 AM on September 22, 2008


There's going to be far fewer of these guys showing up for work now.
posted by netbros at 6:38 AM on September 22, 2008


Ah my apologies - I didn't realise the Long / Short link was rather inaccessible until I got a couple of emails asking questions. It really doesn't explain the details so well.

A 130 / 30 fund operates by using $0.30 of every dollar raised to short shares (well used to, but more on short selling later). So the fund manager picks securities that he or she believes will decline in value and sells them. This action, short by definition leads to a cash infusion - what to do with this money?

Well, this extra money is used to go long or purchase shares that it is believed will increase in value.

So they picked up some leverage by the short sale, $0.30 in fact, thus the 130 / 30 name.

This approach to portfolio management is taken as we know that long only strategies can lead to what in finance we'd call "sub optimal performance". In other words, we can do better.

A few key points: Looking at this from the Risk Management point of view ('cause the Fund Manager might not tell you this): We saw a lot of 130 / 30 or Long / Short activity during the TMT run up. I'm not sure how much business goes into this domain these days.

Until recently The Big Trade was to short banks and go long oil. I haven't seen any evidence saying what a lot of folks are up to now, but as I've already said a few times here, its seems like a lot of the money is moving into various Volatility Arbitrage plays; trying to profit off the actual volatility of the markets. In fact, The VIX (an indicator of market volaility) hit a six year high last week, although it has declined a little since. So I'm willing to bet we're gonna see some extreme market volatility in the near to intermediate term.


And that comment I made upthread about shorting?

Well, there's been lots of reports about various Securities Regulators in the G7 banning (temporarily, one would be led to believe) short selling. Markets reportedly rallied in part due to these bans.

What crap. Its still pretty damn easy, almost trivial, to short sell financials.

Consider a case where someone would like to short Bank of America (ticker BAC). They've been looking over the Credit Default Swap spreads I've previously posted to Metafilter, and think BAC's earnings are gonna get beat to death over the next quarter. No doubt about it - BAC is only going in one direction - down.

So they'd like to short but SEC Man sez no. But they can pretty easily short it anyway. How?

They short shares in 'Dow Diamonds' (ticker DIA), a Dow 30 ETF that contains Bank of America shares - amoung 29 others.

They next purchase shares in the other 29 companies, thus leaving their position market neutral all shares but BAC, which they are now short. There are a few details I'm glossing over, but that's pretty much it.

Took about five seconds to think of that when they announced the ban on shorts. I'm sure there are other loopholes.

Disclaimer: I'm a cash flow investor, very risk averse, and don't engage in nor do I recommend the strategy described here. But I do know how many of the hedge fund strategies work.
posted by Mutant at 7:02 AM on September 22, 2008 [11 favorites]


Mutant: don't most of these arbitrage games find and eliminate pricing inefficiencies? Isn't that good for the rest of the economy that wants to use the otherwise inefficiently priced assets? I could see the gain to everyone else of having corn priced 1/10^6 better be less than the money extracted by traders, but I don't know.
posted by a robot made out of meat at 7:09 AM on September 22, 2008


Imagine if you had someone with the potential to be a brilliant scientist or engineer, but rather then take a job where he actually creates and produces, he simply plays poker all day. He makes good money, better money then he would in his field but it's really a loss for society. No one really makes any money doing this, it's just shifted around.

I think wallstreet has sort of become the same way. Obviously you need some sort of system to help investment money find it's way to investments that will benefit society, but exactly how much overhead should there be? I mean if the whole point of the banking system is to make things more 'efficient' how efficient can it really be if Hedge Funds are taking 20% of the profits each year? And with all the zero-sum derivatives being swapped around I have to wonder how much money is actually being used to make investments and how much is just going towards lining the pockets of the wallstreet wizkids? (and obviously that money finds its way back into the economy, as they buy up private jets, bugatti veyrons, etc)
posted by delmoi at 7:09 AM on September 22, 2008


"A gambler creates no wealth"
While this may be technically true, when viewed narrowly, I recommend you read 'The Poker Face of Wall Street' for an interesting counter to this idea.
Historically, there have been plenty of cases where gambling acted as wealth redistribution, allowing a consolidation of capital to be put to useful purpose.

The example I remember best was gold miners in California.
Mining happened during the summer, and during the winter there was a lot of gambling. The winners took their money and started towns and businesses, making room for more miners. The losers had to go out and find more gold the next summer.
posted by bashos_frog at 7:18 AM on September 22, 2008 [1 favorite]


Yeh, but the thing that struck me about that article is they're applying quantitative risk management techniques to gambling and even going so far as to run a training camp in Serbia. Their marketing spiel is that they can increase odds in their favour by 2% to 3%.

Does anyone have Lion King's "Circle of Life" playing in their head right now? Well maybe I'm the only one (Wilmott articles by Thorpe), but I sort of blame Thorpe for making casinos so boring. I'm thoroughly convinced that even though his book lead to the infamous MIT team, which broke up due to the stress of playing nothing but fucking blackjack all day, it lead to the corporate takeover of Las Vegas. I'm not saying that house odds weren't known before the book came out, I'm saying it makes it a lot easier to shop around instruments with strong, formal mathematics behind them, which is something I guess we could have learned from the last couple of days. Math is to finance marketing like half-naked twins are to beer ads.

Sorry I'm a little sour, I just came back from Vegas (I won!), and couldn't find a blackjack table on the strip. I'm not talking about the hideous, pornographic 3:2 blackjack, which anyone except a "bros" trip will recognize as not blackjack at all but a built-in ATM machine for the bank, but the terribly insidious continuous shuffle machine at the Bellagio. Really Vegas? Come on, throw a bone to us. I guess if the over-gelled, pink shirt and Louis Vuitton 25 year old next to me keeps throwing down $25 chips they'll keep throwing this shit to us.

Anyway, my personal experience with hedge fund employees, and this is skewed as these were just out college hedge fund types, that they carried a prep school swagger that appealed to that kind of investor. A suave salesman that oversells and then whips operations into getting the rates of returns they want. Of course there are a billion different hedge funds, so defining them is sort of like saying gays all spend their weekends taking whippets at nightclubs, when the vast majority are dull and boring.
posted by geoff. at 7:19 AM on September 22, 2008


They short shares in 'Dow Diamonds' (ticker DIA), a Dow 30 ETF that contains Bank of America shares - amoung 29 others.

Well this adds a lot of frictional/transactional costs to shorting, so it restricts the ability for retail or smaller players to take large positions against BAC. The funny thing is, I immediately scratched my head and thought of shorting an ETF and buying the other companies in the fund as a synthetic short. There's so many ways to do this.

FWIW reverse iron condors, while getting expensive, is still a way to spin an easy 6-8% a month, with more importantly, known risks. And the fact you're out of the end of every month, is really, really nice.
posted by geoff. at 7:40 AM on September 22, 2008 [2 favorites]


a robot made out of meat -- "Mutant: don't most of these arbitrage games find and eliminate pricing inefficiencies? Isn't that good for the rest of the economy that wants to use the otherwise inefficiently priced assets? I could see the gain to everyone else of having corn priced 1/10^6 better be less than the money extracted by traders, but I don't know."

Exactly; the textbook definition of arbitrage is the simultaneous purchase and sale of identical assets in different markets. The buying / selling pressure in the two markets drives prices to an equilibrium point where the arbitrage is no longer profitable. In other words, the difference in prices across the two markets, plus transaction fees, is approximately identical. That type of arbitrage does indeed benefit everyone.

Historically, arbitrage is nothing new; in fact there have been documented examples of arbitrage as long as there has been commerce. Centuries, in all kinds of political and economic systems. What has changed though in recent years is the sheer size and speed with which arbitrage can take place with.

According to the 2008 edition of Hedge Fund Asset Flows & Trends, total industry assets under management exceeded $2.5 TRILLION as of Q3 2007 (don't purchase their report, I just passed along the most useful tidbit of data from it).

Now while that sounds like - and is - a lot, keep in mind almost no hedge funds trade un-leveraged. Depending upon the fund, credit rating, manager, the Prime Brokerage they are using, staff CVs (important, as geoff. notes), etc, etc, leverage might range from one to perhaps ten OR MORE for every dollar deployed. LTCM, for example, was running about 25 or 30:1 leverage before it's difficulties - which actually led to it (for a short time) leveraging up to 100:1. In other words, $100 controlling assets in the markets for every $1 raised.

So. I think they may have gotten just a little too damn large for greater good. Meaning the overall health of the financial system. Truth be told, if there is a lot of focus on Volatility Arbitrage or Correlation strategies, we're probably going to see enormous swings in the markets. Especially so are more than one player will be operating, and they'll probably be on different sides of the same trades.

Until, of course, these opportunities are arbitraged away, and the funds involved get distracted by other opportunities.

What the fix to this problem is I certainly don't know, and I doubt anyone on Metafiter has the background to devise something workable either. I've got great hopes that Paulson hasn't gone feral, and realises this is something else that has to be fixed while he's got the toolbox out and the hood open.

Absolutely correct about friction geoff. - I wonder how much shorting is still going on?

Funds here in the UK are making a crap load of noise about the short ban to the FSA, even planning to sue. Which they rarely do here. Very un-British. Probably got caught out on the wrong side of a short squeeze.
posted by Mutant at 7:54 AM on September 22, 2008 [1 favorite]


With the possible exception of LTCM 10 years ago (in which no federal money was actually spent)

But the Fed explicitly was backing this action, and only didn't need to use taxpayer money because they were able to convince the players to bak LTCM with the promise that they'd cover, if needed.

You couldn't rescue a LTCM this way today -- nobody has the liquid capital needed. We tried similar with AIG, and nobody was willing to buy any of it.

Hedges funds work small margins into large profits by leverage. Firms with large leveraged positions that go sour are in trouble. Firms with large leveraged positions that go sour in the face of a capital market that basically isn't moving money at all *implode at staggering speeds*.

This is almost certainly going to happen. It'll probably happen this week. There are too many bad bets in play, and too little available capital to tide you over until you can unwind cleanly.

Hell, *money markets* are breaking the buck and halting redemptions.
posted by eriko at 8:14 AM on September 22, 2008


Instead of banning shorts, why doesn't the SEC investigate naked shorting? Or would that expose the broker-dealers and hedge funds too much?
posted by ryoshu at 8:15 AM on September 22, 2008


Maybe, I dunno, a job 5-10 on a chain gang.

"Join the Khmer Bleu today! We have cameras, but then we shot all the photographers! This movement, it vibrates - with indignation! All the beans you can eat!"

Thanks for the post, Mutant!
posted by Alvy Ampersand at 8:22 AM on September 22, 2008


ryoshu: According to my sources naked short selling is creepy but ultimately a "sideshow" in this situation (comments on that podcast notwithstanding). (PS IANAE)
posted by Potomac Avenue at 8:28 AM on September 22, 2008


it's the average citizens that are on the losing side. Oh, and the Treasury.

And this guy: The Führer gets a margin call.
posted by sfenders at 8:39 AM on September 22, 2008


Yeah Mutant, very stimulating post. Honestly, with your expertise and passion in the area of finance I feel so pleased you replied to my comment and am so glad you're here on the blue during this historic economic time.

Just read this:
``The decision [re Goldman, Morgan] marks the end of Wall Street as we have known it,'' said William Isaac, a former chairman of the Federal Deposit Insurance Corp. ``It's too bad.''

That would leave a lot of itchy gamblers looking for a scratch.

applying quantitative risk management techniques to gambling and even going so far as to run a training camp in Serbia. Their marketing spiel is that they can increase odds in their favour by 2% to 3%.

George Clooney and Kevin Spacey come to mind in this Hollywood movie, a sort of Boot Camp For Gambling. Ooh, a Bill Murray spoof of that a la Stripes would be fun. This is nuts!

Interesting there are active poker players on MeFi. With math-'n-geek skillz that makes sense.

Fascinating anecdote about your running art galleries downtown. I didn't understand something you said:
I'll be damned if one of his pieces wasn't acquired by MOMA. Not that I'm suggesting any conflict of interest, mind you, after all these decisions are taken by a committee.

Why would there be a conflict of interest?

For 15 years I street vended outside MOMA and came to know a lot about the place from the staff who'd stop by and chat. One thing I learned is that it's corrupt in a number of ways. As a small example, in spite of there being a Mississippi River of humanity for months who went to see the Matisse show, it apparently "lost money". Going there some months ago on free Friday to see what the new building is like, see the new exhibits, I was pretty repelled by most of their new collections. Somehow the hedgefunders getting into the art market seems surreal in the worst way.
posted by nickyskye at 9:00 AM on September 22, 2008 [1 favorite]


Somehow the hedgefunders getting into the art market seems surreal in the worst way.

Art as an investment class for the rich is nothing new. A few years ago I remember reading an article about how the Russians were coming to Sotheby's/Christie's in sloppy suits and shoes that would belay their more proletarian beginnings (the horrors). In the 80s I believe there were art fund setup to cash in on this. Even 60 Minutes this week had an article on how private art galleries will buy art at auction at an inflated price and store it in their basements, lest anyone not bid on an object and the bottom come out of the market.

Price manipulation in the art market is nothing new, and in my opinion, actively encouraged by the big auction houses. The truly sad part is that there are all kinds of priceless art sitting in some underground cave in the Swiss alps. Which I guess is sort of fitting in sort of a post-modern art gallery kind of way. Climate controlled rooms, in complete darkness, that no one is allowed into, are the great art galleries of the 21st century.
posted by geoff. at 9:16 AM on September 22, 2008 [1 favorite]


Profiting from other people's lawsuits, a practice known as champerty, is illegal in some jurisdictions and risks accusations of ambulance-chasing, but Juridica is concentrating on backing business plaintiffs, where the practice is better established and more accepted.

Strange vested interests.


If you think that's strange, nickyskye, ever hear of the viaticals industry? It's an obscure, but highly lucrative secondary market within the life insurance industry where investors buy-out the life insurance policies of the elderly and terminally ill at deep discounts from their value at maturity, but more than their cash surrender value. When the original policy owner dies, the investor make a nice, predictable return on their investment.

To give you a sense for just how swampy the ethical territory surrounding the viaticals market is: The first major boom for the industry came with the appearance of the AIDS epidemic in the 80s, when it was still a pretty safe bet anyone diagnosed with AIDS wouldn't be around by the time the ink on the settlement check dried.

/slight tangent
posted by saulgoodman at 9:43 AM on September 22, 2008


oh wow. Thanks for the replies geoff. and saul goodman. Am learning so much in this thread. All I learned previously about hedge funds was teaching my former neighbor, a French trader, English this last year. His thing is derivatives, vanilla options. But I couldn't wrap my math challenged brain around the hedge fund thing. In January he talked (somewhat amusingly) about "Ze Big Crack" that was going to happen to the financial markets, the plummet that has, in fact, happened.

geoff. I do know a tiny bit about art investment. But the hedge fund aspect seems to be betting on the whiff of the aroma of the concept of the oil paint, rather than on anything reality based.

I remember that Russian immigration wave in the 80's. They used to be the scourge of street vendors by MOMA, stealing us blind, lol. They were a rough lot with an incredible affinity for art. There were a couple of hot out of hell Soviet kids, Igor and Stas, who raked in millions here in NYC, coralling the immigrant Russian artists and selling their work on the street. Brilliant and dangerous entrepreneurs in their very early 20's. I can only imagine the suppressed art craving produced by the Soviet regime.

Climate controlled rooms, in complete darkness, that no one is allowed into, are the great art galleries of the 21st century.

Yes, that's grim and strange.

saul goodman, When the original policy owner dies, the investor make a nice, predictable return on their investment.

whoa! Croakanomics. yikes. The Viaticals industry sounds incredible.

The first major boom for the industry came with the appearance of the AIDS epidemic in the 80s, when it was still a pretty safe bet anyone diagnosed with AIDS wouldn't be around by the time the ink on the settlement check dried.

omg! Talk about financial vampires. Way strange and dark. Got to get the squick cleaning soap out and wash my mind.

Thank you both for an amazing education.

What's odd to me is the secrecy aspect of hedge funds, "they are not open to the public, they do not have to make public disclosures of their investments or investors."

It would seem that in hedge funds the combination of secrecy, large amounts of money and gambling is highly likely to produce obsessive self-and-other-destruction, addiction and, predictably, disaster. Why people who bet on variables are not able to see the trajectory of that makes no sense.
posted by nickyskye at 10:36 AM on September 22, 2008


For the sake of completeness, here is a link to the current twoplustwo.com discussion of the poker hedge fund proposal. Twoplustwo.com is the leading poker forum on the net and the discussion raises some key flaws from a poker player's perspective. I think the most interesting stuff is from post 27 onwards.
posted by mosk at 10:48 AM on September 22, 2008


Imagine if you had someone with the potential to be a brilliant scientist or engineer, but rather then take a job where he actually creates and produces, ... I think wallstreet has sort of become the same way.

Forget the "poker" step - without trying to comment on the "value" of this, I went to engineering school and a lot of people ended up coming out of there and going to Wall Street and other NYC finance jobs rather than into engineering. Remember that if you think you're gonna play the market like a hotshot - you're going against huge groups of people who frankly just know much more math than you.

Of course now some of them are out of jobs or close to it, (It takes a while to know, e.g. people I know at Lehman are apparently finding out today if they work for Barclay's or not.) while I earn maybe a third of what they were but should be pretty secure for several years unless things get really Zimbabwe.
posted by TheOnlyCoolTim at 11:02 AM on September 22, 2008


get really Zimbabwe

ouch.
posted by nickyskye at 12:26 PM on September 22, 2008


Long Term Capital Management was one of the key inflection points in the long slide toward failure. Greenspan himself said that LTCM had a 'less than 50% chance' of taking down the world financial system, meaning he likely thought it was north of 33%.

The thought that any one entity could even POSSIBLY take down the world financial system meant the financial system needed to be fixed. Instead, after watching eleven smart guys nearly take down the entire world all by themselves, Greenspan decided that derivatives were GREAT, a STABILIZING INFLUENCE, and started pushing them to the world as the Savior of All Things. After another decade of massive derivative expansion, well, it's not just one entity that could kill us. ANY ONE OF A NUMBER of large failures would result in meltdown.

Instead of one LTCM, we have dozens, and hundreds more wannabes. And people are actually cheerleading for this kind of financial insanity.

The financial system has disconnected itself from the economy; the debt it's spinning out is far in excess of the actual wealth generation of the world. The economy is being consumed, like a body ridden with cancer. The world financial system has been given unlimited 'nutrition', in the form of cash from the Fed whenever anything started to go wrong -- and when it mutated and went cancerous, anytime the body's systems detected that something was amiss, the Fed short-circuited the natural defense against speculation and greed, recession.

The cancer cells will argue vehemently that the function they serve is necessary and important (and would be, were the cells contained to the original organ), but the monstrosities they've grown into are sucking the life and wealth out of everything they touch. This post has many good examples.

See also: national debt of United States, post bailout.
posted by Malor at 12:53 PM on September 22, 2008


Mutant, just a general comment here: your posts are ridiculously informative.

Have you considered writing an economics blog? You have a real knack for explaining economics terms (and the intricacies of our current financial crisis) in laypeople's terms.
posted by uxo at 1:21 PM on September 22, 2008 [2 favorites]



saulgoodman -- "If you think that's strange, nickyskye, ever hear of the viaticals industry? It's an obscure, but highly lucrative secondary market within the life insurance industry where investors buy-out the life insurance policies of the elderly and terminally ill at deep discounts from their value at maturity, but more than their cash surrender value. When the original policy owner dies, the investor make a nice, predictable return on their investment.

To give you a sense for just how swampy the ethical territory surrounding the viaticals market is: The first major boom for the industry came with the appearance of the AIDS epidemic in the 80s, when it was still a pretty safe bet anyone diagnosed with AIDS wouldn't be around by the time the ink on the settlement check dried."



Ha this is a great seque saulgoodman; even without diseases such as AIDS (which are the subject of intense research efforts), these things were always very uncertain. The case of Jeanne Calment comes to mind. Excerpting

"In 1965, aged 90, with no living heirs, Jeanne Calment signed a deal, common in France, to sell her condominium apartment en viager to lawyer François Raffray. Raffray, then aged 47, agreed to pay a monthly sum until she died, an agreement sometimes called a "reverse mortgage". At the time of the deal, the value of the apartment was equal to ten years of payments. Calment lived more than thirty additional years. Raffray died of cancer in December 1995, at the age of 77, leaving his widow to continue the payments for twenty more months. "

Ha! That extra thirty years plus twenty more months sure as hell messed up someone's business plan!

Personal aside: I'd have a real problem putting any of my money in such investments, I even moved out of tobacco stocks, giving up an 18% plus yield years ago. But as it's not illegal and probably could actually help someone ... I won't pass judgment on anyone who invests in these things.
posted by Mutant at 1:23 PM on September 22, 2008 [2 favorites]


It's time we move from an ownership society to a pwnership society!
posted by lunit at 1:36 PM on September 22, 2008 [1 favorite]


Seconding uxo's compliment about Mutant's writing being informative and intelligent. YAY friendly, patient, wonderfully articulate brainiacs on the blue.

Re: viatical vulturing: Interesting there's no regulation in DC. highest ethical standards of the business. Not.

And oh yeah, Mutant, I remember that amazing Jeanne Calment story when it first came out! I speculated that Calment would likely be a pathological narcissist because they seem to outlive everybody and especially because her children predeceased her at very young ages, which I've observed to happen with pathological narcissist parents. And she only quit smoking at 117 but restarted at 118. Incredible.

pwnership society

Isn't that called a Bear Market?
posted by nickyskye at 2:01 PM on September 22, 2008


Dammit, I was hoping my idea for a mutual fund that only buys lottery tickets was original.
posted by mkb at 7:34 PM on September 22, 2008


I am enamored with Mark Cuban's hedge fund. Sports betting seems like a market that is completely arbitragable because it's entertainment for a huge portion of the population -- more so than poker players.
posted by amuseDetachment at 8:44 PM on September 22, 2008


I have a hard time believing in the friendly-neighborhood SEC when they don't allow me to bet against someone's (or a large group of someones') stupidity. That generally indicates to me a lack of faith in the system when you don't let people play by the normal rules.
posted by Civil_Disobedient at 9:26 PM on September 22, 2008


I can see the idea of a poker hedge fund makes sense. After all, it's what many poker players have sought to do in the past -- sell off points in their own game in an attempt to spread the risk. However, the idea of these training camps seems completely retarded. If you haven't got the self discipline to study the game long term, then the chances are, you aren't going to beat it. And if you have got that discipline, its hard to see what good a few days of training camp will do for you.

And whose going to teach it? Some of the nosebleed-stakes players regularly have downswings of several million at a time. David Benyamine is the classic example. In any month, he might be up a million or down a million in his online game. And when he's not playing online, he's playing live at Bobby's Room in the Bellagio.

Or take Brian Townshend. As of last year, there was a consensus that Townshend was probably the best HSNL player in the world. He certainly won more money than everybody else, working his way up from a grinder to continually beating everyone in the highest games.

That all changed last year when he went and played in the $2,000/$4,000 game at the Bellagio. He reportedly took a million dollars off Sammy Farha, and then Bobby Baldwin, the hotel's manager, took all of his winnings, plus a mil or so more off him. Since then, his game just hasn't been the same. Nevertheless, Townshend still teaches at one of the online poker training schools, despite no longer being able to beat the game himself at the moment.

I suppose taking a few days to try to instill money management skills into gamblers who grind the $5/10 stakes might make sense, if only to try and minimize the potential for monkey tilt. But it's a higher risk business than any I'd want to invest in.

See the recent story of Cornell Fiji, for example.
posted by PeterMcDermott at 4:28 AM on September 23, 2008


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