Wednesday, June 27, 2007

What Hedge Funds and Paris Hilton Have In Common

So before I begin this post, let me say that while I know the original intent of this blog was to address my fish out of water experiences as a city girl on a farm in rural NC (with goats), it's also a forum for me to write and a place for me to express my views. So while this post may not be all that country, it's what was on my mind today. And as dad put it - it might drive up traffic assuming anyone is searching for "Paris Hilton" and "Hedge Funds."

So, driving to work this morning, I was listening to NPR, as I always do. The Marketplace Morning Report came on and after hearing the lead story, Hedge Fund Boom Bound For Bustville, I was so incensed, so enraged that I got into the office and promptly wrote the following response:

What Hedge Funds and Paris Hilton Have in Common

I think I know how Paris Hilton must feel. To be so maligned by the media. To be so misunderstood. To be so miscast. Of course, I am not an actress/singer/model/celebutante/soon-to-be-philanthropist who finds myself frequently fleeing the ugly glare of the paparazzi and my every move scrutinized by the mainstream media. I am Director of Marketing for a hedge fund, and hedge funds have become the Paris Hilton of the business and financial media. Maligned. Misunderstood. Miscast.

Blame the blow-up of Amaranth last summer. Or the recent collapse – near-collapse – I am not sure any more – of Bear Stearns’ 2 hedge funds. Blame Hakan Yalincak, the NYU whiz kid who falsely solicited $8 million from investors and proceeded to commit bank fraud and wire fraud and who now faces 42 months in prison. Blame the $52 million paycheck for Lloyd Blankefein, CEO of Goldman Sachs which, these days, is thought of as a giant hedge fund. Blame the Tom Wolfe article in Portfolio or New York Magazine’s coverage of hedge fund wives. Blame the hedge fund show currently in development at HBO from the producers of Entourage and the writers of Ocean’s 13.

The media would have you believe that all hedge fund managers – exempt from regulation and oversight – sit in well-appointed rooms in their expansive Greenwich manses or their posh New York penthouses and conspire on how to manipulate markets and cheat the little guy so that they can further line their bespoke pockets. That all hedge funds managers are evil and greedy with such a surfeit of wealth that they can casually drop $150 million on a painting or throw themselves a $10 million birthday complete with performances by Rod Stewart and Patti LaBelle.

The media would have you believe that all hedge funds use tremendous amounts of leverage to juice returns and therefore threaten market stability. That all hedge funds engage in risky and complex transactions at the expense of ordinary investors who somehow lose out as a result.

Frankly – it’s gotten exhausting and David Frum’s commentary on the June 27th Marketplace Morning Report pushed me over the edge. It was full of generalizations, half-truths and was so simplistic in its criticism that it felt like a roll-up of every other negative hedge fund article I’ve read in the last 12 months.

First of all, the term hedge fund has become so broad and encompasses so many styles of investing, that to comment on “8,000 hedge funds” as if we were a single group is ridiculous. Scientists developed a system of taxonomy for organisms for a reason and it is no different with hedge funds. There are funds that invest in currencies. Funds that invest in countries. Funds that invest in sectors. Funds that invest in movies. Wine. Art. Funds that invest in the weather. In energy. Public securities. Private securities. Real estate. Insurance policies. Debt. Funds that go long. Funds that go short. Sometimes they do both. Some funds use leverage. Others don’t. For those that do, they are not always levering up 5 – 6 times. Sometimes it’s more benign. There are domestic funds. Global funds. Funds that focus on emerging markets. There are funds that use complex, proprietary algorithms to detect and benefit from market inefficiencies. Funds that use derivatives. Swaps. Futures. There are long-term, value oriented investors and day traders. There are stock pickers and market timers. Bottoms up versus top down. Growth versus value. Event-driven. Distressed. Arbitrage. The list goes on.

Secondly, let’s look at the word hedge. According to, a hedge is “an act or means of preventing complete loss of a bet, an argument, an investment, or the like, with a partially counterbalancing or qualifying one.” Preventing complete loss. That doesn’t sound risky or dangerous to me. In fact, a true hedge fund is a diversification tool meant to reduce risk and offer protection in the event of a market downturn.

Certainly I’ll admit that in a pool of 8,000 there are bound to be a few bad apples. A few rogues and grifters. But isn’t that true with any industry?

Perhaps commentators like Mr. Frum would better serve their listeners if they focused not on rehashing the same old hedge-funds-are-evil-and-here’s-why story, and instead focused on the value that hedge funds bring to the market. Because after all, according to Mr. Frum, most of us are the market.

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I have no idea if Marketplace will read from my response on their weekly comments section, but now you dear readers know how I feel on the subject.

And because this blog is entitled If That Ain't Country, I've included a picture of Paris and Nicole from their first season on The Simple Life when they lived on a farm.

And if that ain't country, I'll kiss your...