Video: WSJ on Wealth Inequality – Causes and Solutions

wealth_inequalityI happened upon this excellent little video put out by the Red Communists who run the Wall Street Journal today. Since I think:

1. Wealth Inequality is a Top 3 issue facing the US and the World;

2. I’m in favor of everything that adds helpfully to the discussion;

3. We all have a hard time agreeing on basic facts about the causes and extent of wealth inequality (never mind the solutions!) and calm presentations like this are therefore particularly welcome!


Please see related posts

Video: Visualizing inequality

Inequality in America – The Map

Video: A Ted Talk by a Plutocrat on Inequality

Book Review: Plutocrats by Chrystia Freelander

Video: Chrystia Freeland Ted Talk on Inequality

Book Review: The Price of Inequality by Joseph Stiglitz



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What is a Hedge Fund? WSJ answers

Hedge FundI’m quick to criticize traditional media when they dumb down, or sex up, or just miss completely on finance topics.

The Wall Street Journal is better than most, but still I find myself shaking my fist at the paper from time to time.

Earlier this week, in anticipation of the relaxation of rules for Hedge Fund advertising – and most importantly, the WSJ’s pole position to attract that advertising – they ran an explanatory article on ‘What is a Hedge Fund?’

Actually, it’s quite good, and accompanied by an audio clip as well.  Since the article is behind a pay wall for many, I’ve quoted it here:


Ask 10 investors to define “hedge fund” and you’re likely to get 10 different answers.

The catchall term is used to describe an industry with an estimated $2.4 trillion in assets and an array of portfolios that feature dramatically different investment strategies, tolerance for risk and goals for returns.

“It’s a misguided term that tells you nothing” about the manager’s investment approach, says Jason Gerlach, president of the California Hedge Fund Association and managing director at hedge-fund firm Sunrise Capital Partners LLC in San Diego.

Instead, the term generally refers to the structure of the investment: “It generally means a private investment partnership” instead of, say, a mutual fund, Mr. Gerlach says.

Though long viewed by many as secretive instruments offered only to the extremely wealthy via privileged connections or exclusive websites, hedge funds are about to come out of the closet: An 80-year-old ban on hedge-fund advertising is falling away, and some of these private investment pools are gearing up to launch ad campaigns—likely as early as this month.

Mysterious for a Reason?

Some believe the advertisements will help demystify the strategies used by hedge-fund managers. “Hedge funds are often raked over the coals because they’re mysterious, but they’re mysterious because regulators don’t let them talk,” says Mitch Ackles, president of the Hedge Fund Association and chief executive of Hedge Fund PR LLC, a strategy and marketing company.

Hedge-fund manager John Paulson reaped huge gains betting against subprime mortgages in 2007 and 2008.

The term “hedge fund” was reportedly first used by Alfred Winslow Jones, a sociologist and financial journalist who created an investment partnership in 1952. Mr. Jones used leverage—that is, borrowing—to increase his investment exposure, and sold short what he believed to be overvalued securities in an attempt to “hedge” the market and profit regardless of whether it rose or fell.

Today, hedge funds still generally employ a hedging technique—counterbalancing one investment against another—but even that is not always the case, says Josh Charney, a fund analyst at investment-research firm Morningstar Inc. “That was the first purpose of a hedge fund, to hedge and offer some safety, but over time it has strayed from that original definition,” he says.

But hedge funds still typically have more-flexible investment strategies than mutual funds. They may have higher leverage, for instance, or invest heavily in illiquid holdings such as art, antiques or thinly traded securities.

For these more aggressive tactics, the funds typically charge steeper fees than do mutual funds, generally an asset-management fee of 1% to 2% and a performance fee of 20% of the fund’s profit annually.

In an effort to protect investors with limited means, hedge funds are closed by federal securities law to all but “accredited” investors—which includes individuals with an annual income that exceeds $200,000 for the past two years or a net worth exceeding $1 million excluding their primary residence. In addition, the funds generally require minimum investments of at least $250,000 and limit how frequently investors may withdraw cash.

Hedge Fund Research Inc.’s HFRI Fund Weighted Composite Index, a broad proxy for the hedge-fund universe, gained 3.8% this year through August (net of fees), while the S&P 500 index gained 16.2% with dividends and the Barclays Government/Credit Bond Index shed 3.2% over the same period, according to HFR. For the five years through August, the HFRI Fund Weighted Composite Index gained an annualized 3.4% while the S&P 500 index gained 7.3% with dividends.

Range of Volatility

Investors generally look to the funds to reduce volatility. But prospective investors should understand that just as some hedge-fund strategies may enhance returns, they may also amplify losses, and some strategies are more volatile than others.

“Investors have to judge each fund individually because fund managers may be doing vastly different things,” says Mr. Ackles.

“Relative value” arbitrage strategies account for about 27% of industry assets, according to HFR. Managers of relative-value funds will simultaneously buy markets or investments expected to appreciate, while selling related securities expected to depreciate, seeking to profit from their relative value. That allows the funds to generate returns with little correlation to markets. Such strategies can be executed with convertible bonds, preferred securities, options, warrants and other instruments.

As Hurricane Katrina bore down on the U.S. in the summer of 2005, for example, some hedge-fund managers owned short-term contracts on oil and gas, a bet that prices would rise soon. But they also took bearish positions on longer-dated contracts, a bet that the prices would fall in coming months.

Relative-value arbitrage funds may employ lots of leverage, which can result in big gains or losses. Long-Term Capital Portfolio LP, which famously collapsed in 1998, was a relative-value fund.

This year through July, the HFRI Relative Value (Total) Index has gained about 3.6%, according to HFR.

Then there are event-driven hedge funds, which invest in securities that may be affected by corporate activity such as bankruptcies, mergers, reorganizations and hostile takeovers. Managers of these funds seek to predict the relative movement of the securities involved. A manager may invest, for example, in the stock of a company that is being acquired while also selling short the stock of the acquiring company. Event-driven strategies that focus on companies in financial trouble are often referred to as distressed investing.

Event-driven funds fared well in the first half, partly due to a dynamic merger-and-acquisition and corporate-actions environment, according to HFR. The HFRI Event-Driven (Total) Index gained 6.9% this year through July. Funds using these strategies account for about 26% of industry assets, according to HFR.

Next in size, with about 21% of industry assets, HFR says, are so-called macro strategy hedge funds, which, as their name suggests, invest with a broad outlook that tries to anticipate changes in economic trends and policy decisions.

Some of the funds that use a macro strategy invest in stocks, bonds, currencies and commodities, and may shift their exposure to asset classes and countries rapidly. Such funds often employ leverage and derivatives to enhance the impact of market moves, and their returns may be very volatile as a result.

Global macro investing is one of the best-known hedge-fund strategies, partly because it has been employed by well-known managers such as George Soros and Julian Robertson.

Many macro hedge funds were popular in the 1990s and posted big gains during the 2008 financial crisis. This year through July, the HFRI Macro (Total) Index has slipped 0.95%, according to HFR.

Ms. Maxey is a special writer for The Wall Street Journal in New York. Email her at


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Now, Alanis, For Something Really Ironic

There’s comedy, there’s high comedy, and then there’s Wall Street Journal Op-Eds.  Phil Purcell writes this morning about the opportunity to cure “Too Big To Fail.”  He urges shareholders to split our mega-banks into smaller, more manageable entities.

Since I happen to agree strongly with that goal, I naturally sat up straighter at the breakfast table, ignored the screaming two-year-old[1] and gripped my cereal spoon a little tighter, all the better to pay attention to Purcell’s piece.

But Purcell crusades Wall Street Journal style, so I should have been prepared for his giant helping of unreflective Jell-O.  He served up a plate of 1950s thoughts, masquerading as a new idea.[2]

Ah, where to begin?  Let’s start with the fact that Purcell himself created one of the Too Big To Fail behemoths, leading Dean Witter’s acquisition of Morgan Stanley in 1997.  He then headed the combined firm before being pushed out in 2005.  All the ‘synergies,’ all the ‘costs savings,’ all the ‘shareholder value’ he made happen with that exciting merger?  He’s awfully quiet about that now.  I’m not saying he’s apologetic, as he mostly certainly is not.  Just quiet.

At the point in his Op-Ed where he notes that Morgan Stanley Dean Witter had to be bailed out by taxpayers in 2008, Purcell ought to contritely note his part in the creation of a massive Too Big To Fail bank.[3]  But he’s not about to apologize for the unholy mess that he engineered, to his personal benefit, capped off at the end by a $113.7 million[4] exit package.[5]  The fact that he brought a perfectly nice retail brokerage (Dean Witter) under the same roof as an M&A and trading powerhouse (Morgan Stanley) resulted in an opportunity for private gain for him by the time he left in 2005, and public liabilities for us taxpayers in 2008, just three years later.  But that’s not his concern, and that obviously goes unmentioned.

What he is very concerned with, however, is shareholder value.  Purcell rightly points out that investors discount the share prices of firms that could not survive the 2008 crisis without a taxpayer bailout.  Shareholder value, I agree, is a worthwhile concern.  Not the primary concern when it comes to TBTF, but still, a valid concern.

Purcell proposes that shareholders advocate a break-up of the giant banks.  Nevermind the fact that shareholders have close to zero effectiveness [6] [7] when it comes to managing big governance issues of publicly owned corporations.  The only folks who have the power to choose to break up their own big public firms are the ones in the CEO seat.  Few CEOs willingly shrink their own kingdoms.  It just doesn’t happen that way.[8]

Purcell’s main recommendation is to split the TBTF banks into smaller entities, so that client-oriented firms “should be spun off to give the value to shareholders,” while high growth financial-service companies should be owned privately.  You know, by private equity companies.  And here’s the weird thing you’ll be shocked by:  Purcell, strangely enough, runs a private equity firm that purchases high growth financial service companies!  What a happy coincidence!  He’s just here to help.

So, to sum up:  We should combine financial firms into Too Big To Fail banks from 1998 to 2008, as it will greatly enhance the probability of extraordinary CEO pay from a shareholder-owned company, and never mind the taxpayer bailout to follow.  In 2012, we should break up these same banks to sell them to your private equity business?  Again, you don’t even mention the taxpayer bailout or the policy implications of the government welfare underlying your fortune?

Thanks for your thought leadership through the years, Mr. Purcell.  My two year-old is more selfless than you.  Now why is she crying again?

[1] My wife made me include that detail.  Not sure why.  Wives work in mysterious ways.

[2] “Mr. Romney!  Mr. Romney!    A Telex just came in for you, and I had the secretary make you a carbon copy!  Mr. Purcell accepts your offer of Treasury Secretary in the new administration!”

[3] Is it too much to ask that we get a little Japanese-style begging of forgiveness from guys like Purcell?  Just a deep bow and a contrite apology – I really think it would go a long way.

[4] Read about it here.  There’s a great passage at the end of the NY Times coverage, in which Purcell’s departure and golden parachute kicks off a competitive feeding frenzy of private enrichment at the top of Morgan Stanley, headed then by John Mack.  A compensation consultant calls it “an ‘ice cream war’ between children, where one wants as much as the other. ‘Except that, in this case,’ he said, ‘somebody seems to have got the whole ice cream factory.’”  Oh, the good old days.

[5] If you have a strong appetite for self-serving crap, can I interest you in Phil Purcell’s Wikipedia entry?  Which he clearly wrote himself?  He’s not well-known enough to have anybody come in and edit his entry and add a dose of realism, although Wikipedia notes that the page probably needs some editing.  (Meaning, there’s only been one author of the post, Purcell himself.)

[6] The “Shareholder Democracy” aka “Say on Pay” Movements exist in the minds of a few business school professors.  But they’ve had no noticeable effect on the business world.

[7] The exception to the rule being a few well-known hedge fund agitators like Daniel Loeb, Bill Ackman, or the wily veteran Carl Icahn.

[8] Mubarak, Saleh, Gaddafi, and Assad used to get together at pool parties and laugh at the relative accountability and haplessness of American financial CEOs Pandit, Moynahan, Dimon, and Blankfein.  Now Blankfein’s all like, “Shoe’s on the other foot now, bitch!  They can’t make me leave!”

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