4/23/07

What else is troubling me, thinks the bunny as he gnaws his way through a huge bunch of kale. Dark greens are good for you.

These days, what makes the bunny's jaws grind even more than congressmen and presidential wannabes are hedge funds.

Like most prey animals, the bunny does not like taking risks. But he is truly baffled by how much faith (and money) humans place in these freewheeling, cowboying crap shoots in suits.

Originally thought up as a means to balance out risk, hedge funds' original goal of "hedging" is defunct in all but name. There are now over nine thousand of these funds, financed heavily by high net-worth private investors and free from much of the regulatory pressure which define the conduct of peer investment organizations. Basically, these self-styled financial gurus lock up capital for a period, with their investments leveraged on the order of about 20 to 1. The formula usually goes 2% annual charges to the investor--and 20% of the profits to the hedge fund manager.

This kind of gig sorely tempts the young, for it can rapidly enable any nitwit to parlay someone else's money into a Nolita condo and one of the various foreign status-mobiles the bunny always sees double-parked in front of Pastis. (Along with the obligatory and unfortunately-termed coke bunny in the front seat--the bunny views this slur as an affront to lagomorphs everywhere.)

For those of you who read history, the bunny would like to remind you to read up on the investment pools of pre-1929. Former Fed fuhrer Greenspan didn't slap tighter controls on hedge funds for fear they'd flee offshore--which they did anyway, many of these funds having incorporated outside US limits.

The bunny hopes tighter controls will be enacted to rein in the crazy trading and wild capital surges of the hedge funds (or at least the banks that work with them). Their wild ways make for volcanic volatility, and one bad day (as opposed to, say, a bad month for stock markets) can bring disaster down on the whole warren. Bayou Management or KL Group, anyone?

The bunny is not alone on this. On 4/12 Ben Bernanke at least tried to ring the bells, though few besides the bunny seemed to notice. "The failure of a highly leveraged fund holding large, concentrated positions could involve the forced liquidation of these positions, possibly at fire-sale prices, thereby imposing heavy losses on counterparties," he intoned. ("Counterparties" in this context would be everybody else, starting with commercial and investment banks, then their depositors; after that, the pellets roll downhill.) "In the worst scenarios, these counterparty losses could lead to further defaults or threaten systematically important institutions." (For more of Bernanke's long answer, check out this short article, http://select.nytimes.com/search/restricted/article?res=F20911FB395B0C718DDDAD0894DF404482)

In other words, the style and volume of hedge fund activity is enough to spill the whole cauldron (and scald the cook to death.) Look up, look up, greedy primates, warns the bunny. Pouring money into hedge funds in hopes of quick enrichment is tantamount to baring your cheeks to the buzzards.