Thursday, March 4, 2010

It's not the hedge funds, stupid!

Ready, fire, aim. That's what the Justice Department appears to be doing in opening an investigation on whether hedge funds colluded to bet against the Euro. SAC Capital, Greenlight Capital, Soros Fund Management and Paulson & Co. are among the funds who have received inquiries from Justice.

The inquiry partly stems from the fact that several hedge fund managers were in attendance at an "idea dinner" hosted by advisory firm Monness, Crespi , Hardt & Co. where investing ideas were discussed.

This "investigation" shows us, as if we needed convincing, two things. First, hedge funds continue to draw unwarranted scrutiny from regulators and media. Second, and more important, it is more proof that the deeply-rooted long-bias in our system of financial oversight is not changing.

This systemic bias that extends from Main Street to Pennsylvania Avenue is becoming the single largest threat to hedge fund reputation and operations.

Was it a mystery that Greece was overleveraged? No. It seems that months ago we saw reporting that currency and sovereign debt traders coined the word PIGS as a pejorative for the European economies bound for trouble (Portugal, Italy, Greece, Spain). Why wouldn't hedge funds or any other investment manager realize the same thing and try to profit from that assumption?

Where is the accountability? It's like Greece, Bear Stearns, Fannie Mae, Enron (the list goes on) were not to blame. We are led to believe that it was the "speculators," "short sellers," or "profiteers" who caused the problem.

Every trade has a buyer and a seller. Someone wins and someone "loses." Shorting is the same buying and, technically, has more risk (because the security can appreciate to infinity, while it can only depreciate to zero).

There are too few voices trying to set the record straight. Here are a couple:

Jim Chanos, quoted in the Wall Street Journal, today explains that going long the dollar is "exactly the same trade as going short the euro...It gets to a certain point of demonizing traders and hedge funds for mistakes elsewhere."

Peter Eavis, financial columnist for The Wall Street Journal acknowledges media and government overreaction to trading activity related to Greece's crisis and the fall in the Euro. He writes, "it appears that hedge funds are seen as more suspicious than other market participants....any evenhanded probe woul have to involve [banks] too. And how about the companies that sell Euros as a hedge for their business operations? Perhaps the more prosaic truth is that there are good reasons for the Euro to fall."

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