Hedge funds blowing up helps pay for pensions(fattailedthoughts.substack.com) |
Hedge funds blowing up helps pay for pensions(fattailedthoughts.substack.com) |
"Most of the money these hedge funds manage comes from pension funds, endowments, and similar organizations that are trying to grow their investments today to pay out the needs of retirees and students tomorrow. We do not know how to create a system that allows fund managers to design novel investment strategies that are risk-free. If we want to continue to encourage fund managers to invent strategies that potentially generate large returns for their investors, we have to accept that blows-ups are part of that invention process."
The linked article presents a straw man that the only two hedge fund investing options are "risk-free" and "occasionally blowing up", and since we can't have the former we have to accept the latter.
But the Archegos-Credit Suisse case shows clearly that there is a middle ground, that much can be done to prevent blowups. The big banks just don't bother. Proper risk management by banks would help pension funds much more than simply negligently letting hedge funds blow up.
"I know in the long term private equity is supposed to give us very healthy returns, but that of course has not been the case for quite some time,” said Sung Won Sohn at Tuesday’s board meeting. “It’s been anything but healthy returns…"
https://www.nakedcapitalism.com/2021/04/lacers-board-member-...
But how does it follow that regulations should restrict a pension's choices?
The point I was trying to make above is that better risk management by banks that lend to hedge funds would be actually beneficial to pension funds, as opposed to letting hedge funds blow up randomly, whose value is as yet not established.
The interests of the prime broker and hedge fund investors are often not aligned. e.g. Archegos - Goldman dumped the Viacom shares to save the bank from losses at the expense of Archegos.
Responsibility for a pension fund's risk sits with the pension fund.
Now if you're proposing that limiting a hedge fund's access to leverage by preventing banks from extending such leverage would overall de-risk the system thus providing a safer playing field for pension funds... possible, but you're attempting to derive causation in a complex system which begs the question of what unpredictable derivative effects come along with the change, the magnitude of those effects, and their net effect on safety.