Friday, May 9, 2014

Hedge funds and little guys...

Picture a 51 year-old man sitting at his desk, fidgeting, his face contorting as if he's experiencing physical pain before he clicks the link to a New York Times Op-Ed written by a well-known Nobel laureate economist. That was me a few minutes ago. The economist was none other than Paul Krugman. Now, you'd think that an economics junkie like me would approach a few minutes of taking in the commentary of a Nobel economist with sheer excitement. Oh, but Mr. Krugman is not your everyday Nobel economist.

In fact, economics (or thoughtful, or legitimate, or sensible economics) generally has very little to do with his frequent ramblings in the Times. Generally, it's about how evil are the rich and the republicans. As for rich republicans, well, if there were only a word more evil than evil. There remains not a remnant of the objectivity he displayed as a younger budding economist. Today it's all about promoting whatever the "progressive" platform deems promote-worthy.

So why the facial contortions? Well, it's that so often when I read Krugman I just can't help but grab my keyboard and flail away. Even when, as is the case this evening, I'd rather be reading a good book. Today's column, alas, leaves me once again unable to resist.

Lately that "progressive" platform is all (or largely) about "income inequality". On this day, for "progressive" Paul Krugman, it's about high paid hedge fund managers.

Here's a snippet:
Once upon a time, you might have been able to argue with a straight face that all this wheeling and dealing was productive, that the financial elite was actually providing services to society commensurate with its rewards. But, at this point, the evidence suggests that hedge funds are a bad deal for everyone except their managers; they don’t deliver high enough returns to justify those huge fees, and they’re a major source of economic instability.

More broadly, we’re still living in the shadow of a crisis brought on by a runaway financial industry. Total catastrophe was avoided by bailing out banks at taxpayer expense, but we’re still nowhere close to making up for job losses in the millions and economic losses in the trillions. Given that history, do you really want to claim that America’s top earners — who are mainly either financial managers or executives at big corporations — are economic heroes?

Finally, a close look at the rich list supports the thesis made famous by Thomas Piketty in his book “Capital in the Twenty-First Century” — namely, that we’re on our way toward a society dominated by wealth, much of it inherited, rather than work.

At first sight, this may not be obvious. The members of the rich list are, after all, self-made men. But, by and large, they did their self-making a long time ago. As Bloomberg View’s Matt Levine points out, these days a lot of top money managers’ income comes not from investing other people’s money but from returns on their own accumulated wealth — that is, the reason they make so much is the fact that they’re already very rich.

(Piketty's book, which is all the rage among "progressives" these days, is second in my pile after the one I'm finishing. So I'll be back later with my opinion...)

Before I continue, I want to say that I reject the popular notion that "total catastrophe" was avoided by not allowing the market to deal with the banks. Not that there was no role for the Fed to play during the crisis, but the fact that the taxpayer was fleeced to pay the price of the utter carelessness, the lack of due diligence, and the greed of the biggest players (and, especially, their investors) in the financial industry---under the unwarranted assumption that the world as we knew it was about to end---is, well, I can't seem to come up with words sufficient to describe the egregiousness. 

While there are several angles from which to approach this one, in the interest of my time and yours, I'll jump on the one that came to mind first.

Being one whose income comes from fees paid by investors, I have many times thought Geez! Those hedge fund fees are outrageous! And when you consider their (on average) underperformance the past few years, well, geez!

But the thing is, rich folks---not little guys---invest in hedge funds, and it's entirely their business that they subject their portfolios to those huge fees. So it's not about the little guy when we talk about hedge fund expenses. It is about the little guy, however, when we talk about the companies hedge funds invest in. Companies that employ little guys. Companies whose stocks are owned by the funds little guys own in their 401(k) accounts. And if the hedge funds are any good at all, they'll buy good companies, and short bad ones. Which---short pain notwithstanding---is a good thing for the little guy. That is, more good companies mean more good jobs, and more good stocks, for the little guy.

And, interestingly, as Krugman points out, that $21 billion made by those top hedge fund managers came mostly by way of the returns they earned by investing in their own funds. Which, ironically, didn't come close to the returns the average investor investing in a plain old S&P 500 index fund earned last year. That's right, the average hedge fund returned barely a fourth of what the S&P 500 returned in 2013. My, the fun Krugman would be having had the hedge fund billionaires made $80 billion last year.

And, lastly, Krugman says it's all about taxes. Meaning, we should be taxing those rich rats. Okay, so let's tax that top 25's income at 100%. Just think about all the good a politician could do with that $21 billion. After all, it amounts to a whole two days worth of government spending. Well, at least we'd then protect the little guys from those hedge funds that invest in the companies they work for and invest in in their 401(k) accounts. Companies like the ones listed below. The ones that, as of 12/31/2013, happened to have occupied the top ten positions in Appaloosa Management LP, the hedge fund managed by David Tepper, the highest paid manager in the business the past two years running:

1. The SPDR S&P 500 (SPY): An exchange traded fund that invests in the stocks of the 500 employers that make up the S&P 500 Index.
2. Powershares QQQ: An exchange traded fund that invests in the stocks of employers listed on the NASDAQ stock exchange.
3. Citigroup
4. Goodyear Tire and Rubber
5. Google
6. HCA
7. United Continental Holdings
8. General Motors
9. Huntsman Corp.
10. American Airlines


No comments:

Post a Comment