IT’S BOTH AMAZING AND a little bit bizarre that the same mainstream media that told folks to stick it out for the long haul while the market melted in 2000 and 2001 are now writing smear pieces about hedge funds simply because they’re not minting money this year. Indeed, we’re now in the golden age of hedge fund hysteria, with each passing day delivering new negative charges against an industry that by almost every yardstick should be celebrated, not demonized.
At the heart of this hysteria is a complete ignorance of what hedge funds really are, both among the regulators who oversee them and the financial media that have, in recent weeks, whipped up a panic about how hedge funds threaten to disrupt financial markets world-wide. So let’s start by simply defining the term: A hedge fund is a pool of money pledged by “accredited” (read: rich) investors and managed by a general partner. While most people assume that hedge funds trade frequently and make big bets on financial esoterica, the truth is a hedge fund is a legal structure, not an investment technique.
So while the media routinely characterize hedge funds as “risky” or “highly leveraged,” the reality is hedge fund strategies, just like mutual fund strategies, run the gamut from the ultra-conservative to the highly volatile. Some funds use high levels of leverage, others sit in cash for months at a time. Some employ complex spread trades, while others simply buy and sell stocks. Just knowing someone runs a hedge fund tells you absolutely nothing about how it’s run. What matters are the strategies, positions and discipline that the manager uses to maximize the money. (more…)