Hedge Funds are a bit funny; you have to pay 3 to 4 percent for management fees and other fees, plus about 20 percent of the profit, yet more and more people are crazy about them. For many years average hedge fund returns were 11 percent according to Business Week, but now the returns have become lower on the huge amounts invested in hedge funds. Maybe there is too much competition. Many smaller investors are involved in hedge funds through fund of fund groups, which require as little as a $25,000 investment, as opposed to a $1 million investment directly in a hedge fund. A fund of funds is a mutual fund that invests in several different hedge funds. This gives an opportunity for smaller investors, but the fees are higher, since there's one more level of management to deal with. Altogether there is believed to be $1.5 trillion in hedge fund money in about 8,000 different hedge funds. They are under increasing pressure to be regulated after the largest collapse of a hedge fund ever, the Amaranth fund, which cost investors over $6 billion.
The other big thing hitting the markets is look-alike hedge funds, sometimes called ARFs (Absolute Returns Funds). These are similar to what ETFs, Exchange Traded Funds have been to mutual funds. ETFs are a basket of securities that are often designed to mimic mutual funds, but at a much lower broker's fee. Look-alike funds mimic ETF's relationship to mutual funds, by running profiles of the investment strategies of various hedge funds and mimicking them. Then the broker fee is only 1 or 2 percent, and there is no whopping 20 percent profit fee. These look-alike funds are definitely around, and if you ask your broker about them or do a few Google searches, you can get them. Although hedge funds total about $1.5 trillion in invested funds and mutual funds total much more money, about $8 trillion, hedge funds have an increased weight because of their use of leverage. At a ten to one ratios the effective investment power of the hedge funds can be greater than mutual funds.
To tell you the truth, if you read the financial press, it is a bit of a mystery what exactly the frenzied attraction to hedge funds actually is. They are invested in a combination of derivatives, mergers and acquisitions, selling short and some murkier deals in the ?deregulated universe?. The danger is, as predicted by some soothsayers in 2005, that some funds will over-leverage and take excessive risks and go bust. That is exactly what happened to Amaranth hedge fund that had a $6 billion plus blowout on the oil futures market.
Definition Of Hedge Fund
With the collapse of the Amaranth Hedge fund, nervousness in the financial community is increasing all over the place. A new quirk in the collapse of Amaranth is that the German finance minister, Peter Steinbrueck, will make hedge fund regulation an important issue of Germany's G-7 presidency next year. Also Brian Hunter, the Amaranth trader responsible for the natural gas derivatives disaster of Amaranth worked for Deutsche bank until 2003. He lost some money betting on natural gas futures there and was kicked out on the but he still had the gall to sue them for his bonus. Of course there is a funny side to this. Amaranth Hedge Fund official Tom Schnurr in a letter to the SEC wrote: ??The hedge fund industry is a shining EXAMPLE OF American free enterprise. Please do not try to fix something that isn't broken?. Well having people's pensions, like in San Diego California disappear because of a wrong bet of natural gas prices, doesn't seem to me like something that is not ?fixable?.
There are lots of Amaranths going under. It's getting tough to make money fair and square. The derivatives market, with energy and commodity prices falling as the economy collapses. A lot of Canadian (as in a suburb of the Cayman Islands) hedge funds are in lots of trouble. Peter Lindner managing director of Delta One Capital partners?admitted he has lost a bundle. ?Clearly anyone who is long in oil and gas stocks has done very poorly? Lindner says.
The next collapsed feared and actually experienced is the real estate bubble. No wonder the Bushie League wants to start another war, or even a nuclear war someplace. Their economic policy of globalization and free trade is coming under increasing attack. The Philadelphia Fed Reserve reported a plunge in manufacturing in the Mid-atlantic region due to the housing collapse. A major portion of the manufacturing economy in the U.S. is based on producing steel, equipment, plywood, sheetrock and other products for building construction.
The collapse of the real estate bubble has to interact with the collapse of the speculation around the Hedge Funds. Yes, some Hedge Funds are still making money, but a hole could be blown in the system. The NAR (National Assoication of Realtors) testified before Congress that estimated existing home sales (85-percent of the market) would be down 8-percent. This is turn would cause an 1.5-percent decline in the economy as a whole. August sales were 12% below those of August 2005. Hardest hit were condos and the Western region. Viva Las Vegas?!! One analyst said that house prices are going to have to drop a lot further and more homes will have to be pulled off the market, before housing prices stabilize. With the collapse of auto production in the U.S. all sorts of cartelization schemes are being played with by those great industrial geniuses?.that's right folks, the Hedge Funds!!
Der Spiegel warns about th $1 trillion dollar bomb under the hedges?.and there are more big losers in the Amaranth collapse. Tune in for more real crash tomorrow. Time for a New Bretton Woods conference , for a new monetary system based on production and sovereign nation states.
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