Page 21 - Griffenomics

FACT: HEDGE FUNDS ARE ONE OF THE MANY WAYS THAT INDIVIDUALS CAN INVEST IN THE ECONOMY
SPRING ISSUE GRIFFENOMICS
21
tion does not decrease the value of gold.
This is what hedge funds do, except on
a much larger scale. Not only can hedge
funds invest in normal securities, they
can also invest in other hedge funds: a
process which is called a “fund of funds”.
This is when a hedge fund mixes hedge
funds with other pooled investment ve-
hicles, such as mutual funds.
Hedge funds can seriously aƒect a
country’s economy. Hedge funds can
cause sharp increases in share prices,
known as run-ups, which can cause un-
sophisticated individual investors to buy
these stocks. This is because the individ-
ual investors have seen a tremendous in-
crease in the price of the share, and they
assume that the stock will continue to do
so and that they can make a profit if they
buy in. However, if the hedge fund should
then sell their shares in the stockmarket,
and invest elsewhere, in bonds or com-
modities for example, then the individu-
al investors can lose a lot of money as the
decrease in share prices encourages peo-
ple to rapidly sell. This loss of confidence
may potentially mean that people lose
their savings, which they’ve invested, as a
result of the hedge funds’ actions.
Another way in which hedge funds
can cause serious implications is through
fraud, and a good example of how hedge
funds may be abused is the Madoƒ In-
vestment Scandal which broke in De-
cember 2008. In June 2009, Bernard L.
Madoƒ was sentenced to 150 years in
prison for fraud, after creating the big-
gest Ponzi scheme in existence through
the wealth management arm of his busi-
ness, Bernard L. Madoƒ Investment Se-
curities LLC. A Ponzi scheme is when an
investment operation pays returns to its
investors from its existing capital, or new
capital from new investors, rather than
from profit earned by the fund manager.
Madoƒ admitted that he hadn’t actual-
ly traded since the early 1990s, with the
size of his fraud estimated to be $64.8bn.
This scandal was not only devastating for
stocks overall, but also created a chain
reaction throughout the world’s business
and philanthropic communities, which
forced many organizations, such as the
Picower Foundation, to, at the very least,
temporarily close.
However, on the whole, I don’t feel
that hedge funds are as wholly evil as the
media portrays them to be. Despite these
recent challenges, such as the Madoƒ
fraud, hedge funds continue to oƒer a sol-
id alternative to traditional investment
funds, and as a result, I think that they
are here to stay, especially if they begin to
be regulated, which has been suggested
by the US government through the im-
plementation of the Dodd-Frank reforms
in July 2010.
FURTHER READING:
‘More Money Than God’
by Sebastien Mallaby
“Hedge funds can seriously impact on a country’s economy. They can
cause sharp increases in share prices, known as run-ups, which can
cause unsophisticated individual investors to buy these stocks.
TOP PERFORMING
HEDGE FUNDS
Ranked in YTD total return (%)
1) Glenview Capital
Opportunity - 84.2
2) Matrix Capital
Management - 56.0
3) Paulson Recovery - 45.0
4) Lansdowne Developed
Markets SIF - 44.5
5) The Children’s
Investment - 39.7
6) Owl Creek Overseas -
38.1
7) Glenview Capital
Partners - 37.4
8) Trian Partners - 34.9
9) Palomino - 31.5
10) Pelham Long/Short -
30.3
MADOFF
Bernard Madoff
directed a Ponzi
scheme that totalled
around 6.8b USD
Source: Bloomberg Media
Photo by Jin Lee/Bloomberg
MAKING CHANGES The Dodd-Frank Wall Street Reform, signed at the Ronald Regan Building shown above, was passed as a response to the Great Recession
Photo courtesy of Wikimedia Commons