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November 27, 2005
Double or nothing
The New York Times online -- registration required, with some constraints that render it impossible for me ever to recall either my ID or my password -- is running an article about pension funds starting to push real money into hedge funds. If you thought having your index fund manager buy GOOG was a problem, you must not have money in a pension fund. According to the article, pension funds account for "40 percent of all institutional money," and their investments in hedge funds are growing exponentially.
Of course the author has to write something about how safe this all is, but it's driven by reasoning like that of the managers at General Motors:
The company is using hedge funds, along with other unconventional investments, in hopes of getting something close to stock market returns without the market's volatility, Mr. Dubrowski said. To pay out the $6.5 billion G.M. owes to its retirees each year, the pension fund must produce annual returns of a little more than 7 percent. Otherwise, G.M. will have to dip into the fund's principal. At current interest rates, G.M. cannot get those returns with bond investments, and if it tries to juice returns by betting on the stock market, it will have to cope with market swings.
Translation: We didn't know how to manage our pension fund, so now we're playing Ponzi games and buying lottery tickets in the hope that we'll be working somewhere else when stuff hits the fan.
My guess is that hedge funds play an appropriate role when they're used as hedges. In other words, when they're used to balance the risk of other investments supposed to provide the expected gains. Inevitably though they've given off the strong scent of tulip bulbs, and that scent has been blow into the noses of people "managing" your retirement money. Watch what happens as a few of them come back with early high returns.
(Early large winnings correlate with addiction to gambling.)
Posted by Mark at November 27, 2005 09:47 AM
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