_$ and Know: Economics with Elias Tezapsidis

By Elias Tezapsidis

I am sure you have noticed this has been a highly uneventful week from an economic standpoint; we only had some minor losses. The loving U.S. government seized suffering American International Group, proving that the credit crisis is affecting credit insurance contracts. Bank of America bought Merill Lynch, shocking the New York crowds with the rushed sale. These same crowds were running around the streets in a chaotic milieu because the Lehman Brothers filed for bankruptcy. Financial stables have proved to be unstable in the economic crisis we are currently facing. Unfortunately, I cannot explain how the aforementioned nightmares became a reality for the economic world. I remain innocent; do not forget that. But I asked around, and it turns out that several economists attribute the economic catastrophe to the unwinding of debt. Debt needs to be paid off, and capital cushions need to be plumped up. But I am here to protect you Macalester student. Hedge funds are feared to be the next area to suffer from this never-ending loss and tear-inducing economy.

Let’s take it slow, though, I don’t want you using Wikipedia in your attempt to decipher what I am talking about. Let me take care of that. More than 9,000 hedge funds exist, and more than 300 manage amounts of $1 billion or more. Hedge funds can be defined as managed portfolios that target a specific return goal regardless of the conditions of the market. Hedge funds are a means to invest in a relatively unrestrained manner, using any sort of investing tool to include leverage (reinvesting a loan to gain a higher rate of return than that of the loan), short sales (predicting a decrease in price of a stock or bond, selling it “borrowed” from a broker in order to be bought in the future, hopefully at a lower price) and other methods.

Hedge funds charge high fees (like Macalester) and are unpredictable and fickle (like Minnesota weather). Many firms and institutions depend on borrowed money to enhance their returns, but banks’ ability to do so is decreasing. If hedge funds can no longer borrow green, an additional barrier to returns has been created. Due to their unpredictable nature, they are sometimes viewed as the gambling way of investing. Sounds like fun, doesn’t it?

In the beginning, hedge funds started in order to make money. They exploited inefficiencies in commodities or currencies, raising money on a private level and gradually creating this legendary mystery surrounding them. This mystery was based on the wisdom of excellent traders, used to serve their affluent clients. Hedge funds during the eighties and the nineties flourished more than disco music and bad hairdos. Governments weren’t as strict or nosy and the financial field was less regulated. During this golden era of the hedge funds, the first investor celebrities rose to fame, such as George Soros.

When we think of pop music, we think of Michael Jackson; when we think of postmodern art, we think of Marcel Duchamp. If there is a name associated with hedge funds, it is George Soros.

Soros operates one of the world’s biggest private investment funds, Soros Fund Management. In 1992, he made more than $1 billion, betting on the devaluation of the pound sterling by selling $10 billion worth of pounds, like Monopoly, but with real money. Soros tends to donate millions to philanthropic causes and charitable organizations, as do the exorbitantly wealthy. Add to your list of reasons to love Soros his attempt to defeat George W. Bush in the 2004 presidential election by spending over $23 million. How Macalester of him!-

Enough with the hedge fund elite. The common crowds, like you and me, sometimes forget to separate hedge funds from private equity (I will explain private equity in a future column). Private equity investing is meant to last a longer time and to control more stakes of firms than hedge funds. Hedge funds allow investors to enter or leave the fund in an easier manner, but private equity investors cannot exit. Hedge fund investors do not think about how their investments will hold up in two or three years-like Private Equity does-but on a day-to-day basis. In terms of a soundtrack, hedge funds are Daft Punk’s “Harder, Better, Faster, Stronger” and private equity is Ying Yang Twins’ “Wait.” Puns intended.

Since investment banks have been engaged in hedge funds in an increasing rate, there is no doubt the current economic atmosphere will be soon permeating the realm of hedge funds. Consider yourself warned, and let me know if you have any questions.