Are Hedge Funds a Risk to the System? The Proof is in the Provenge

May. 4.07 | About: Dendreon Corporation (DNDN)

Echo To All submits: Before you read this, know that I am a fan of hedge funds and think they should police themselves. Nevertheless, I acknowledge the arrogance of some. So with that…

A CNNMoney article reports that the Feds are now saying Hedgies may pose a market risk. The reason I say some hedgies are arrogant is because of Dendreon (NASDAQ:DNDN). Hedgies shorting that stock at 5 are down about a half billion. (I am sure they hedged some of their trade, but not all.)

Arrogance like this is what is the problem, not hedge funds. HF investors have to remind their HF managers to remember the first rule of investing: do not lose money. Instead managers are focused on overcoming a hurdle rate or just being greedy.

Some investors are also to blame. When a hedge fund manager blows up a fund, and then 8 months later is able to raise millions upon millions of dollars, the question then becomes, why is the manager going to care about your money? This will lead to arrogance, which will lead to a stupid trade - such as being short DNDN. Or long Natural Gas when the fundamentals at the time did not merit such a trade.