Separating a Fool From His Money With Hedge Funds

More bad news for the hedge funds. It is as if the press were finally waking up to what hedge funds really are – a way to separate a rich fool from his money.

Hedge funds, like all public spectacles, begin with deception. How could anyone paying 2% in fees and 20% in profits ever hope to make much money after taxes? Yet, some of the savviest investors believed they could.

After deception, the stage was set for farce, as Forbes reported recently:

“Hedge funds are a hotbed of questionable behavior, whether at blue-chip Wall Street firms or at fly-by-nights. Two youngsters and a 53-year-old assistant literature professor at a small college in New York formed a hedge fund, JB Stanley, and lost most of the $400,000 they raised from 15 investors. They siphoned off the rest for car payments, ATM cash withdrawals and other personal uses, according to SEC claims that led to a summary judgment against the three managers.”

But things could soon stop being funny.

“The hedge funds have been flooding the market with subprime mortgage bonds in order to raise cash needed to return to investors,” says a recent report by Roddy Boyd. “That has driven down prices across the board, depressing fund performance and making the bonds less attractive as collateral for loans.

“Investors are expected to learn over the next two weeks just how much damage hedge funds have sustained as a result of the subprime mortgage mess, and if the news is as bad as some market players expect, there is a fear that investors could pull out in droves.”

That will be when the final stage of the Crack-Up Boom comes along and farce turns into disaster.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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Deron Kawamoto

Today the FT brings us word that the credit crunch is infecting hedge funds down under as well. Basis Capital of Sydney is restricting redemptions to avoid liquidation. That’s all we get here.

Any insight as to whether the structured credits and junk debt originated in Australia or overseas? The important question in my mind: is this the spread of a US-based contagion to overseas buyers or are we seeing a coordinated global meltdown of risky debt?

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