< meta name="DC.Date.Valid.End" content="20050825"> Amendment Nine: More Hedge Fund Nonesense

Friday, June 17, 2005

More Hedge Fund Nonesense

James Tisch, heir to the Tisch family fortune, and CEO of two of the family's crown jewels, Diamond Offshore and Loews Corp., was on Bloomberg today. He was asked if he thought hedge funds should be "more closely looked at." He paused, took a deep breath, leaned in and spoke these wise words: "Well, yes." He then immediately turned into a clown and began spewing nonesense. According to Tisch, hedge funds aren't traditional investors, they trade in and trade out of companies, even good companies, because they don't take the long approach. Tisch felt we need more people who take a long approach. He then said that the hedge funds are why the volitility isn't there. Despite that absurd contradiction, I'd like to take on the notion that hedge funds are somehow bad faith investors because they trade in and out of companies quite regularly.

Hedge funds deliver year over year return to their investors well above the market, well above mutual funds, and well above most straight private equity players. The way you know I'm not blowing smoke about this is because you know that hedge funds right now are bloated with cash. More and more money is pouring into these guys even as the criticism levels turn up a notch or two. Remember, money makes money. There are all sorts of funds and strategies with different levels of risk and return, fixed-income, tax advantaged, vultures, macros, etc. If hedge funds took a long only approach (and there are actually some who do this - even some vultures who play long only), they would be harder pressed to deliver returns. Why? Simple, by trading out of underperforming companies, by shorting poor performing companies, hedge fund managers become more active, and seize more control over the operations and direction of those companies. Tisch on the other hand wants us to sit back and let him give his family stock options and low interest loans while shareholders sufffer the consequences.

The negativity your seeing right now, and the various lines and arguments against hedge funds being tried out on CNBC and other financial networks is a concerted effort, slowly building, by guys like Tisch. That is, by business roundtable folks with deep pockets, family fortunes, and ties to the power center. Democrats like to call them "crony capitalists", hedge funds just call them "management." There is a war for control right now between active investors and crony capitalist management. The stakes are high, and the fact that some of the best known biz roundtable guys are out there stoking the fire is a sign that the struggle is reaching a new level. America has a big choice to make, are we gonna let investors and owners control their companies, or are we gonna let management keep running good companies into the ground?