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Hedge Funds: I Warned You

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Back in January 2007, five years ago. And here comes The Economist with the results. "There is no doubt that hedge-fund managers have been good at making money for themselves. Many of America’s recently minted billionaires grew rich from hedge clippings. But as a new book by Simon Lack, who spent many years studying hedge funds at JPMorgan, points out, it is hard to think of any clients that have become rich by investing in hedge funds" with an average return since 1998 of 2.1% a year, "half the return they could have achieved by investing in boring old Treasury bills."

"Mr Lack’s book suggests the blind faith displayed by many institutional investors in hedge funds needs to be reconsidered…Investing in hedge funds will enable some lucky managers to enjoy an early retirement on their yachts. It will not enable pension funds to eliminate their deficits." It wasn't blind faith. It was just coming up with an excuse to project future returns to be higher than they would turn out to be, to back a false estimate of the cost of pension enrichments for the pension rich while providing more public money to the one percent.

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Economic Endgame

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The American standard of living has been inflated by debt, and is going down. But I predict the reduction will be experienced in a higher cost of living, not permanently high unemployment. More competition for scarce resources from developing areas in the rest of the world, given a falling dollar, is one reason. The second is a growing inability to import cheap goods from abroad, requring them to be made in the U.S. at higher prices as described here.  If we succeed in inflation our way out of our debt/pension disaster rather than defaulting en-masse, the trend will merely accelerate.

There is, of course, a good side to this as well — more moderate skill jobs could be available in previously declining mid-sized metros, such as those upstate. Warren Buffett's investments in railroads appears smart, given the need to save energy and the possibility of growing domestic production. Unfortunately New York's rail freight system isn't what it was, or could be. In any event read the article, because while the timing may be off, I agree with the premise. And it will run right into labor force shrikage as the baby boom retires. If you really need it, better buy it soon.

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