ill-hedge's  Instablog

There has been ridiculous amounts of criticism of what happened over the past few years to hedge funds, the largely lucrative and infamous collective investment schemes of the world. One must remember that hedge funds are merely a regulatory structure and are simply "allowed" by the government to do more risky things and get away with more because of the 1. possibility of high returns 2. regulation. The only regulation is that there can be no one with less than a million dollars in assets that can invest in these funds. Such a simple concept, but so much trouble.

They say that hedge funds were partly the cause of the recession due to  increased speculation and opposition against shorting. Such things to be opposed to are pointless in the face of much larger crises in the world. Shorting is a legal strategy which wishes to profit off of someone's failure. This does not mean anything outrageous, merely that investors wish to take capital away from the company that is not performing so well. Those who are the richest do make good bets, and the richest people in the world throughout good times and through the crisis were hedge funds, particularly those who shorted subprime pre-crisis and went long financials during crisis time. Government and the misinformed media like to blame profitability, but the serious crime here is unprofitability, because that is what causes waste and hazard.
Speaking from a property rights perspective, there is nothing wrong with borrowing shares (a voluntary action at the perceived benefit of interest), selling them (as per the contract states) and waiting for them to drop in value so that these assets could be as cheap as possible, and then buying them back to make a profit. Besides the negative externality of executing large sell orders, there is little they are violating in the framework of the rule of law.

Blaming an accounting rule mandated by the government is completely fallacious. One cannot blame mark-to-market accounting for the losses during the credit crisis either. This is because you cannot simply blame a law that is merely a rule detailing requisite accounting changes. It is true that these assets are wildly volatile in price, and may exhibit a large standard deviation in prices on the downside, but this should not affect the accounting conventions. Accounting conventions are merely there to understand what is going on with the financial health of the entity.
It is only proper that we, the public, be able to see the daily trend of values of assets. This is only way to make an informed decision in funds management. Changing mark-to-market accounting destroys that knowledge in the marketplace, and therefore should not be taken out.

Real changes we can be making are there to do. Changes in the tax code, regulation, and adherence to the basic personal finance rule: "Do not spend more money than you have" are the road for America to become a more thriving nation.
Such rules, with modifications, can be applied to most sovereign nations.

Disclosure: None of this should be taken as personal advice from a legal regulatory standpoint. Even such compulsory warnings are violations.

The need for efficiency in society does not necessarily increase the most fair society, and this tradeoff represents the clash between free market policies and government control.

For example, trade barriers make it so that certain companies cannot just go bankrupt, facing additional funding and subsidies to produce a less-demanded function. The NYSE and the COMEX, both trading pits where people trade with high transactions costs i.e. floor brokers, full-service brokers and open outcry, physical stock exchanges are no longer needed. It only takes up space where something more societally valuable can be i.e another highly demanded good or service.


Electronic trading, the advent of the NYSE, and computerized-methods save expenditures used for land and other costly maintenance purposes. The only argument for such maintenance purposes might be signals. Signals work in microeconomic manners such as college grades and high paying jobs, as well as  companies business practices. A large stock exchange or trading pit signals to investors, customers, and creditors that this institution is worth investing in, and hence reinforces the continuity assumption.

The companies that usually own these entities are publicly-traded themselves, and like banks who provide elaborate facilities to show trustability in people, perhaps stock exchanges, made relic by electronic trading, still have this marketing advantage. Such companies' share price is also subject to the risk of being publicly traded. Just as a car company's reputation matters ( Not currently with Toyota though huh? ) , the reputation of stock exchanges still never ceases to be useful in your display of longevity.


Disclosure: long electronic, short everything else (paper, ink, books, human trading)

Solow Growth Model and Cobb Douglas function - tells us the growth and productivity of economies,

apply this on a smaller scale to another smaller macroeconomy, the Financial Markets.

"A"- TPF is the technology, access to information,

Possibility of creating a production and growth model for an individual trader, given some statistical measures (probability of success, level of diversification, weightings of asset allocation, probability distribution), and "A".

- InsT have comparative advantage in trading vs. RT.


Institutional traders have many advantages over Retail Traders, greater capital, greater labor, and great "A", which is technology, access to information, sheer numbers of people working for you that add wealth,

The "A" is also known as the bloomberg terminal. That is what creates such a big difference,
- it is very costly to retailers
- is a great information advantage

** perhaps a retail trader who owns a Bloomberg Terminal can trader better, along with prerequisites, ie. not too emotional, diversifies, has experience, ....

those who create efficiency within the markets:
market makers, analysts, short sellers, arbitrageurs, speculators, information companies,

distortion:
politics, red tape, regulations, lack of accountability in government, rent-seeking behavior, psychological irrationality (herd behavior...)