Wednesday, April 18, 2012


Spengler's throttle is wide open as he pummels the hedge fund industry and the illusion that they are constantly beating the "market".  He also suggests that we the people are engaged in a "circle of deceit," i.e. we are lying to ourselves, and each other, about a most important topic: pension funding.  Full post is here.  Excerpts here:

"The putative geniuses with computer trading strategies or outsized market savvy produced returns that the rest of us could only dream of (and took enormous fees for so doing).   Except they didn't.  If you had put your money into hedge funds in 2005 and distributed it across the whole universe of hedge funds, you would have roughly the same amount of money today. By contrast, if you had simply bought the existing universe of publicly traded stocks and bonds and reinvested interest and dividends, your portfolio would have grown by half."

"If the hedge funds performed much worse than either stock or bond index funds, what were they doing there in the first place? There are a few authentic geniuses in the hedge fund business, to be sure, who throw off spectacular returns regularly; there are a larger number of clever fellows who have a great idea one year (like John Paulson, who foresaw the housing collapse) and then lose just as spectacularly the next year. And there are a very large number of Ivy-educated herd-followers in pink shirts and suspenders with no particularly notion of what they should do, some of whom take every opportunity to chisel out a speck of income by nefarious means." 

Unfortunately for the rest of us, the reason that hedge funds have become so important is that they promise, and occasionally deliver, out-sized returns.  Pension funds, which tend to be underfunded, have long pretended that their portfolios of investments would earn 8%-10%.  Such rates of return were supposed to have provide the necessary funds to pay the benefits promised.  A wee problem:  such returns have never materialized on a year-to-year basis.  Ergo, the promised money is not there, and will not be there.

"So here are one-and-a-half cheers for Goldman Sachs. The firm serves one of the most characteristically American of all functions: to help the public believe its own bunkum. Every kid is above average in Lake Woebegone, and every hedge fund will earn excess returns, and every pension fund will beat the market, so that every prospective retiree will avoid the squeeze that confronts all of us not very far down the road."

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