Wednesday, March 2, 2011

Top 10 Hedge Funds Earn $28 Billion for Their Clients

According to AFP,
"The world's top 10 hedge funds netted 28 billion dollars (20 billion euros) for their clients in the second half of last year, the Financial Times reported Wednesday.

Data calculated by hedge-fund investor LCH Investments showed that the top 10 funds made two billion dollars more for their clients than the net profits of Goldman Sachs, JPMorgan, Citigroup, Morgan Stanley, Barclays and HSBC combined.

According to the research, the 10 funds have generated a total of 182 billion dollars in profit for their investors since they were founded, the British business newspaper said."

According to the report, John Paulson, a fellow competitor of George Soros, was the hedge fund exemplar in 2010, as his firm Paulson & Co earned $5.8 billion for its clients in the latter half of the year.

And that's without bailouts. The moral hazards that influence the behaviour of banks, created as a result of government interventions to maintain their financial integrity, do not exist within the hedge fund industry. According to consultant Dan O'Connor,

"What also separates the hedge funds from most of our financial system is that none of the hedge funds had their hands out in search of bailouts during the turmoil of 2008. In fact, a myriad of hedge funds went bust in this period. Some of them, worth billions of dollars, not only collapsed but did so in a very smooth fashion. Their collapse represents the natural process of liquidation, on which Mises and Hayek placed such a great emphasis in their analyses of the boom and bust periods historically caused by the expansion of money and credit."

There are important lessons to be learned from the hedge fund industry. If coercive regulatory restraints fall, the freedom to innovate and earn profits increases. Hedge funds are largely exempt from rules prohibiting short selling, buying or selling options, participating in futures contracts, or mingling in the derivatives market in general. Therefore, the opportunities for hedge funds to earn money are myriad.

Furthermore, as O'Connor indicates, hedge funds cannot rely upon the government for financial assistance, hence they are bound by the profit and loss system. Funds that speculate and hedge in accordance with correct forecasts of future market conditions make money and, therefore, are rewarded for their wisdom. By contrast, funds that act in accordance with false or inaccurate forecasts lose money and go under and, therefore, are punished for their imprudence. Under such a system, profitability is made contingent upon performance and those firms with the best track record of profitable forecasts are thereby allocated the the most capital. The potential for profits, the threat of losses, and the existence of competitors encourage hedge funds to innovate and carefully assess risk.

Is Washington paying attention?

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