Hedge Funds are Back...Whoopee!
It looks like the hedge fund "super-masters" are making billions again. The famous John Paulson will break his previous record of $4 billion in personal profits and net around $5 billion for 2010. To put it in perspective, Goldman Sachs - the entire firm - netted a bit over $8 billion in its trading operations last year.
After 2008, word in some quarters was that hedge funds were doomed. Most hedge funds lost money; even the ones that claimed to actually hedge in some way (many if not most don't actually hedge) lost money, sometimes lots of money. Lots of small and some larger funds closed. Commentators asked what was the point of paying all those fees if you're going to lose money along with everyone else when things get dicey like they did in 2008.
So what's changed? Nothing. In fact, the Wall Street Journal article that reported the big money made by some big hedge fund managers missed the point that Paulson and some of the other guys who made billions last year (yes, there were more of them!) made money in 2008 too.
As is usually the case, all the talk about the end of the hedge fund industry was greatly exaggerated. Look, people were talking about the end of AIG in 2008 (if not the end of the world) and now you see all these articles about how AIG's making a comeback.
And what about GM? All of a sudden we're seeing articles about what a successful year they had in 2010. In fact, we're starting to see talk of GM, Ford and Chrysler/Daimler all having profitable years, even hiring more workers and expanding operations this year.
Yes, I realize these are all different situations. But we can learn something here that I think is important.
The fact is, as bad as the U.S. financial picture looks, the world isn't ending. Even with the recent revelation that our deficit is 50% higher this year over last year (up from $1 trillion to $1.5 trillion), even with the dollar sinking and all the talk of the "end" of the dollar as the world's reserve currency, the world keeps chugging along.
In fact, after the announcement that the deficit increased $500 billion - a number that would have been inconceivable only a few years ago - the stock market turned in a positive day.
It's like nothing can shake the markets or the economy right now.
So back to the hedge fund guys. The thing about these guys that made all this money is that they seem to figure out how to make money no matter what's going on. Paulson, for example, made his previous $4 billion score betting that sub-prime mortgage would be a huge problem - way before almost anyone else believed it. As for his $5 billion this past year, it had nothing to do with sub-prime. He made some other bets and he was right again.
The point is that guys like this would figure out a way to make money if nuclear war broke out and the world was obliterated. All they do all day is figure out how to make money based on what they see going on now. They're basically opportunists - or maybe we should call them super-opportunists.
Now, don't get me wrong. I'm not saying everything's fine and the crisis is over. I'm just saying that even when things seem like they can't get worse, people have a way of muddling through. And since the economy is made up of people, when you add up all us muddlers you get an economy that mostly winds up muddling through. And in the midst of all us muddlers are these guys - these super-opportunists - who, while we're all muddling, figure out how to make a killing.
So maybe it's interesting to some of us that these guys made all this money. But in the end, unless you're one of the super-opportunists, or a budding super-opportunists, it really doesn't matter that those hedge fund guys made all that money, does it?
After 2008, word in some quarters was that hedge funds were doomed. Most hedge funds lost money; even the ones that claimed to actually hedge in some way (many if not most don't actually hedge) lost money, sometimes lots of money. Lots of small and some larger funds closed. Commentators asked what was the point of paying all those fees if you're going to lose money along with everyone else when things get dicey like they did in 2008.
So what's changed? Nothing. In fact, the Wall Street Journal article that reported the big money made by some big hedge fund managers missed the point that Paulson and some of the other guys who made billions last year (yes, there were more of them!) made money in 2008 too.
As is usually the case, all the talk about the end of the hedge fund industry was greatly exaggerated. Look, people were talking about the end of AIG in 2008 (if not the end of the world) and now you see all these articles about how AIG's making a comeback.
And what about GM? All of a sudden we're seeing articles about what a successful year they had in 2010. In fact, we're starting to see talk of GM, Ford and Chrysler/Daimler all having profitable years, even hiring more workers and expanding operations this year.
Yes, I realize these are all different situations. But we can learn something here that I think is important.
The fact is, as bad as the U.S. financial picture looks, the world isn't ending. Even with the recent revelation that our deficit is 50% higher this year over last year (up from $1 trillion to $1.5 trillion), even with the dollar sinking and all the talk of the "end" of the dollar as the world's reserve currency, the world keeps chugging along.
In fact, after the announcement that the deficit increased $500 billion - a number that would have been inconceivable only a few years ago - the stock market turned in a positive day.
It's like nothing can shake the markets or the economy right now.
So back to the hedge fund guys. The thing about these guys that made all this money is that they seem to figure out how to make money no matter what's going on. Paulson, for example, made his previous $4 billion score betting that sub-prime mortgage would be a huge problem - way before almost anyone else believed it. As for his $5 billion this past year, it had nothing to do with sub-prime. He made some other bets and he was right again.
The point is that guys like this would figure out a way to make money if nuclear war broke out and the world was obliterated. All they do all day is figure out how to make money based on what they see going on now. They're basically opportunists - or maybe we should call them super-opportunists.
Now, don't get me wrong. I'm not saying everything's fine and the crisis is over. I'm just saying that even when things seem like they can't get worse, people have a way of muddling through. And since the economy is made up of people, when you add up all us muddlers you get an economy that mostly winds up muddling through. And in the midst of all us muddlers are these guys - these super-opportunists - who, while we're all muddling, figure out how to make a killing.
So maybe it's interesting to some of us that these guys made all this money. But in the end, unless you're one of the super-opportunists, or a budding super-opportunists, it really doesn't matter that those hedge fund guys made all that money, does it?
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