re: Taibbi's "Wall Street is Overpaid" Rant

I can’t believe I’m about to defend the hedge fund industry, but here goes…

I like Matt Taibbi’s work although a lot of my peers on the financial web despise him.  Even when they agree with his basic premise (The Street does more harm than good in society) they tend to take issue with his use of over-generalizations or seemingly devastating barbs which are much less so once put into context.  But even so, the truth he gets at is undeniable and I always read his stuff when it hits.

But his latest, on hedge funds, caught my attention because of how uncharacteristically sloppy it was.  He riffs on the fact that only 11% of hedge funds are performing ahead of the S&P 500 year-to-date and that they’re basically all buying Apple to catch up at this point.

all those super-rich people who turned to hedge funds with their millions in the hopes that bunches of Whiz-Kids from Wharton and Harvard and Yale would find unseen and wildly creative investment ideas to fatten their fortunes – all those rich clients are actually finding out now that those same Whiz Kids are buying Apple just like the rest of us. Hey, it has to be a good stock, right? Everyone has an iPhone now.

Jesus. After all that craziness in the last decade or so, after MF and the London Whale and all that nuttiness, this is what it comes down to? These guys are buying Apple? Couldn’t we have just started off doing that and saved ourselves all that trouble?

Clever, but here’s the problem:

1.  Yes, Apple is a hedge fund hotel, but we’re talking about only hundreds of funds long the stock in a business of thousands of funds.  There is $2 trillion or so in the hedge fund industry and most of it is not chasing Apple or even the stock market.  There are funds trading volatility, credit arb, emerging markets, commodities and on and on.  The boldfaced managers you read about on Page Six tend to be the swashbuckling long-short equity types, but they are not the market.

2.  Any vehicle with the term “hedge” in it, by definition, should not be expected to beat a market that has been melting up.  Hedge funds came about as an alternative for wealthy investors so that even in tough times, they have someone who can play the short side or find other ways to make money when stocks aren’t rising.  You can’t have both.  There are some hedge fund managers who are simply beta + leverage, but these guys don’t last long and they certainly don’t reduce overall volatility in a wealthy person’s portfolio.

3.  Returns are not returns.  There are other considerations that drive people to hedge funds and alternatives.  One key factor would be risk-adjusted returns – if a fund only took half the amount of risk of the overall market but achieved 85% of the upside performance (aka upside capture), that’s a win for many institutions and pension funds, for example.

4.  Hedge funds are not Wall Street.  Wall Street is JPMorgan, Goldman, BAML, Morgan Stanley.  Hedge funds are hedge funds, they are clients of Wall Street for research, financing, product, custodianship and prime brokerage services.  There are a lot of overlaps but hedge funds were not bailed out in 2008, are not meant to be systemic to the financial complex serving America and they certainly don’t sell things to or transact with Main Street (they’d rather be dead).  The amount of money hedge funds hold for retail investors directly is a grain of sand compared to the amount of money held by the banks and i-banks and mainstream asset managers/mutual funds.  Mom and Pop may think it’s all the same thing but I’m sure Taibbi knows better.

So while I agree with his premise that many involved in finance are not worth the money, let’s be specific.  There are enough actually damning things to say about The Street as it is.


More Evidence Wall Street is Overpaid (Rolling Stone)


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