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On Hedge Funds and Criminality June 20, 2008

Posted by shaferfinancial in Uncategorized.
Tags: , , , , , , ,

Prosecuters have arrested a couple of Bear Stearns hedge fund managers for lying to folks about how well their hedge fund was doing. :-).  Give me a break.  First, they are using e-mails as the basis of the indictment.  That’s just lazy lawyering.  If that is all they have this lawsuit will fall apart soon.  But the greater question is who was victimized and why this “lying” is any different than the other Wall Street “lying.”

People who purchase hedge fund shares have to be well heeled.  Over $1M in net worth and over $200,000 in annual income is required to become an accredited investor to invest in hedge funds.  Then there is the prospectus, which lays out in bold that hedge funds are a risky investment that might “lose their entire value.”   So given that these folks, are by definition, people who can afford the risk, and are told up front that they can lose the entire investment, I have a hard  time finding a victim.  Greed clouded their judgment, or at least caused them to take on much risk, for which they learned why they call it risk!

Now, as to the lying aspect.  It was their job to convince folks to buy into the investment just as it is the job of the Wall Street army to convince folks to invest their money in stocks, bonds and mutual funds.  Just because their are some e-mails that congratulate themselves over doing what they are getting paid to do does not mean they are criminals?  How does what they did differ from what the average mutual fund salesmen do?  They sale the sizzle, slyly promising oversized returns, when the reality is for everyone to see.  Sometimes hedge funds deliver great returns, more often they don’t.  They don’t advertise hedge funds as low risk activities to the middle class, so where is the crime?  If you argue that the hedge fund managers should have devalued their assets earlier, you are probably right, but no one could have predicted the total meltdown of the sub-prime mortgages that would occur.  Hope spings eternal even with Wall Street veterans.  That to me is normal human behavior, not criminal activity. 

The truth is that in investing, getting greedy, is a sure way to get burned.  Don’t act like a pirate looking for the buried treasure.  Having a purposeful plan, based in conservative assumptions, is the way to get to your goal!



1. BawldGuy Talking - June 21, 2008

Exactly, David. Grandma was right — The more things change, the more they stay the same.

Very smart folks want us believing how naive they suddenly became. Weak, very weak.

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