Monday, June 16, 2014

The secret world of hedge funds

...and men loved darkness rather than light, because their deeds were evil. John 3:19

It is easy to ignore the utter uselessness of hedge funds.  After all, the whole point of being a member of the Leisure Class is to put one's uselessness on display.  And what can be more useless than to get one's living by gambling?  Hedge funds are just modern and very large-scale bucket shops.  As defined by the U.S. Supreme Court, a bucket shop is "[a]n establishment, nominally for the transaction of a stock exchange business, or business of similar character, but really for the registration of bets, or wagers, usually for small amounts, on the rise or fall of the prices of stocks, grain, oil, etc., there being no transfer or delivery of the stock or commodities nominally dealt in."

These sorts of transactions are zero-sum games.  Since money put into play in bucket shops are not investments, they do not grow the real economy.  So for every winner, there must be losers.  Unfortunately, removing money from the real economy for the purposes of gambling does real damage.  So in truth, the rest of us SHOULD pay attention to the hedge funds.  Turns out, however, that hedge funds operate in secrecy so even if the rest of us wanted to know what they are up to will find it very difficult.  It seems that hedge funds are not merely economically useless, they are downright nefarious.

One of the key provisions of the New Deal was the outlawing of bucket shops.  It seems pretty obvious that any economic renewal these days will outlaw the hedge funds—at least the 99.999% of their activity that has no hedging function whatsoever.  And the rest of us should NEVER be put on the hook for any losses incurred by the folks who participate in this uselessness.

Inside the ruthless and camera-shy world of hedge funds

A former Wall Street trader shares his experience of what finance's secretive gurus are like and how money changes egos, 8 June 2014

Reading the recent New York Magazine piece on Steve Cohen, the billionaire hedge-fund manager of SAC Capital, two themes emerge: he hates fame and he likes to be feared. 

That is not uncommon on Wall Street, where it’s better to be hated and rich than loved and famous.

That is the hierarchy in the finance culture: the more important you are, the less you need to be liked, and the less you need to be seen.

At the very top of the Wall Street pyramid are the billionaire hedge-fund managers like Steve Cohen, masters of the markets who are famous for not wanting fame. Their ability and desire to stay under the radar of the public is a signal of how really important they are.

Garden-variety fame? That is a nasty symptom of being very wealthy that unfairly puts you in the same category as reality TV stars. Those who work on Wall Street are not that, certainly not in their minds.

That sort of fame is like a skin rash that needs to be treated. And as with all things Wall Street, that treatment comes by throwing money at the problem. 

So Steve Cohen has attempted to buy up the rights to photographs of himself, limiting their availability. That isn’t a crazy personal tick.

Many on Wall Street have a similar policy. Especially hedge-fund managers. They flee from cameras, flee from being interviewed, and certainly flee from ever being on Page Six. Unflattering news, unflattering photos, are either bought with money, or buried via legal action.

The distaste of fame often morphs into outright secrecy, especially amongst the hedge-fund set.

If fame is a sign of weakness then secrecy is a sign of success. True masters of the markets don’t need anyone else’s help. They can divine the secrets behind the frenzy of blips on the screen, finding the hidden order in randomness, and turning that into gold. 

If you think you have that secret it’s dumb to tell others about it for free. Much better to charge huge fees to share in the benefits of your special knowledge.

People on TV giving investment advice? Either they are fools who don’t know anything and pretend to know it all, or they're fools who know something and are giving it away for free. Either way, fools.

If you are protecting secrets it also helps to have others fear you. In New York Magazine, he was described thusly:
On the trading floor Cohen was a voracious, unsentimental monster, working his will, conquering all he saw, and verbally thrashing any employee who made a misstep.”
Steve Cohen’s alleged aggressive work behavior is standard on Wall Street. Traders often love to bully other traders. It is almost considered a perk of success. I have so much money; I know the secrets of the universe. I don’t need to bother with things like being polite. 

It also comes from being beaten up so often. Even the best trader loses about 45% of the time, beaten by the markets; random numbers that have no empathy. Taking that beating daily, weekly, monthly, wears on you. If you can’t beat the markets, beat the person closest to you.

I know I certainly did during my Wall Street years, berating anyone who crossed my path at the wrong time. After being wrong, I needed to show somebody I could be right. Reset the ego.

Masters of the markets may not want fame, but some certainly want the trappings it brings: the best tables at the best restaurants, access beyond the velvet ropes, and membership to the most exclusive clubs. 

So they get those things by simply buying them. Everything has a cost, and Wall Street loves to prove that. It confirms their worldview: money is the most important thing.

One of my first business dinners on Wall Street was with a super-wealthy client, a man with hundreds of millions. He was at the tail-end of a long successful career. He insisted on dinner that evening at the then-new Nobu, the hottest and hardest restaurant to get into. When the salesmen explained to him it would be impossible, he laughed, “Everything is possible if you just know how much to pay.”

By the restaurant’s entrance were the usual signs of an invasion of the famous, an array of idling black limos and bulky SUVs, all manned by beefy, idle Russian drivers.

A cluster of plebeians, waiting hours for any table, snaked out the door.

The client split the waiting crowd, went to the maître d, handed him a wad of cash, and got us the best table. 

Our table was surrounded by Manhattan’s famous. We were the nobodies crashing the party. It was important to him to remind us, and the waiter, that he was wrongly viewed as a nobody. He was a somebody. A somebody who knew better than to seek fame. “See them," pointing to the various movie stars around us, "they have to sign grubby scraps of papers from people who probably have tuberculosis.”

He then went on to suggest we order the entire menu. Jokingly. I think.

We didn’t, but it was something he was proud to have done before. Look at me – well, don't look at me too much, but recognize me and my money.

Eventually, for every Wall Street trader, for every hedge-fund manager, there will come a time when it is over. A run of luck will come to an end. The secret that made them feel special will be discovered. Or the regulators will find them, breathing down their necks, challenging the secrets as being too secret, or the wrong type of secrets. 

The markets will win, they always do, and they are not magnanimous in victory.

Then the egos will be bruised, egos built up over many years of being lauded for being able to beat the markets. Egos that haven’t needed fame or love to nurture.

At that point the money is there to offer solace. After a life of secrecy, a life of fear, they can rest with their money.

They can buy sports teams, or collect modern art, or become a philanthropist. They can finally buy public validation.

Go on TV? Nope, that's still far too louche. more

1 comment:

  1. I loved economics, it was a cool subject. Quite confusing however, it was tough to keep up. Like I said though, it was a fun topic to learn about.