I Got Your Hedge Fund Right Here Pal!

I like Jonathan. he's an unabashed Libertarian/Free Market cheerleader. he's also a very wise investor. You can see him on the Fox News Business Block on Saturday mornings. While I don't agree with his "anything goes" immigration beliefs, I do appreciate his intelligent prose when it comes to financial and political criticism.

The Debate Over Hedge Funds
By Jonathan Hoenig Published: April 30, 2007

THE MOST INTERESTING moment in last week's Democratic debate was when both John Edwards and Hillary Clinton were asked their thoughts on hedge funds. Noting that Edwards had been counsel to a hedge fund, NBC's Brian Williams asked him a deceivingly simply question: "Do hedge funds make America any better in any way?" To start, the question itself isn't really a question, but an insult, and shows real economic ignorance and lack of class by Brian Williams. As we've pointed out repeatedly over the years, hedge funds are simply pools of investment capital, the same as mutual funds or even investment clubs. The press loves to stir up a mythology that wealthy hedge funds are suspiciously "secretive" and "closely guarded," but in reality, it is government regulation, not nefarious activity, that prohibits hedge funds from being open about their work. Ever wonder why you've never seen hedge funds advertising in any newspaper or magazine? Or why you've never been sent a postcard about a new hedge fund launch or investment opportunity? That's because SEC regulation restricts hedge funds from soliciting the public in any fashion. It also restricts all "nonaccredited" individuals from investing in hedge funds. "Nonaccredited" simply means not having a million dollars in liquid net worth, a threshold at which the government finally believes you are smart enough to know what to do with your own money. Does Brian Williams, who also happens to be highly paid, even know that? Does Williams, who's won five Emmys, four Edward R. Murrow awards and the George Foster Peabody award, even know what hedge funds actually are? Or does he, like everybody else, just hear stories of hedge-fund managers earning huge paychecks and assume they must be up to no good? Williams's no-so-subtle implication is that hedge funds are bad for America. He's saying, in effect, "I can't think of one single way hedge funds make America any better." With all due respect to Brian Williams, in an age of blogging and YouTube, one could easily ask the same question about network anchormen. But while it's a rude question, it's also an easily answerable one. So how did the two senators respond? Edwards's response was the most disappointing. "I think the financial markets are an important component of trying to figure out what it is we need to do about the fact that we have 47 million people without health care, 37 million people who wake up in poverty every day," he said. (Read the transcript here.) Edwards doesn't answer the question, but merely redirects the inquiry toward the populist message he's undoubtedly been honing over the last four long years. What he might have offered is the notion that it's the financial markets, hedge funds and capitalism in general that we have to thank for the abundant prosperity that all Americans, even those who "wake up in poverty every day" have come to enjoy. As we wrote back in 2001, it's the American businessperson to whom the entire world should be grateful. What creates the heath care, food or shelter Edwards is so eager to give away? Vaccines don't grow on trees, but are created by profit-seeking companies — and the hedge-fund investors who finance them. Edwards said "that we have a responsibility to the people in this country who wake up every day worried about feeding and clothing their children." Is that why Edwards was hired by hedge fund group Fortress Investment Group (FIG) in the fall of 2005, to feed and clothe the nation's children? Of course not. The role of a hedge fund is to make money, not give it away. But for Edwards, that alone is not morally acceptable. Any mention of profit must be accompanied by a guilt trip about charity and self-sacrifice. Edwards finished by saying that "...people in New York who work in financial markets understand — in some ways, at least — what can be done and can play a significant role in trying to lift people up who are struggling." He forgot to mention that's what Wall Street, and the very corporate America that Edwards's "Two Americas" belligerently attacks, does each and every day. The most obvious example is Wal-Mart (WMT), which, by seeking a profit, has bettered the lives of every single being on earth. As an employer, a service provider or general facilitator of trade, Wal-Mart has improved the plight of the world's poor a zillion times more than the senator's volunteer efforts at the Poverty Center at UNC. Yet the company's practices are frequently attacked by Edwards, despite the fact he once owned Wal-Mart stock, and last Christmas had a popular Sony (SNE) PlayStation game console held for him at a local Wal-Mart even as hundreds of everyday folk waited in the cold to hopefully pick up their own. Essentially, for Edwards, it's acceptable to decry Wal-Mart while also owning their stock and shopping there. And it's perfectly fine to work at a hedge fund, but not publicly support their profit-seeking activities. After Edwards's response, Clinton was also asked the same question, "How is America a better place because of all these burgeoning hedge funds?" She started off on the right foot, offering that "America is a great place because we have an entrepreneurial economy. We have people who are willing to make stakes and new enterprises and invest their money." That's where she should have stopped. Unfortunately, Clinton felt compelled to add that, right along with the entrepreneurial economy, "one of the other reasons we're a great country is because we've learned over the years how to regulate that, so nobody gets an unfair advantage." What that really means is that nobody gets an unfair advantage unless Mrs. Clinton, as President, says so. Unfair advantage, in one form or another, seems to be woven into the senator's ideology: Tax breaks for anybody, whether it's green energy or big oil, are unfair advantages. A highly progressive tax system, where the rich pay a bigger percentage of their income, is an unfair advantage. From socialized health care to minimum wage, Clinton seems decidedly against a truly free market solution to anything. It's "equal treatment under the law," except that certain groups are just a bit more equal than others. When asked about hedge funds, whose goal is making money, Clinton also passes on the chance to offer a full-throated endorsement of capitalism. Indeed, as the case with most politicians, every mention of business is coupled with an altruistic call to "give back," reign in the financiers, or, in the case of Clinton, "set the rules." "I also represent a big state where there are a lot of poor people and people who have no access to health care," she says. "They don't have access to affordable college. They're worried about their futures. So what we've got to do here is get back to having a Democratic president who will set the rules." Although her web site, HillaryClinton.com, doesn't (yet) appear to have an "issues" tab with a comprehensive outline of her economic ideals, one could suppose that "setting the rules" means providing entitlements such as college, health care and Social Security, which she called "one of the greatest inventions in American democracy." You quickly get the impression that, no matter if you're a mom-and-pop investor or a multibillion-dollar hedge fund, under Clinton's presidency, your lawful earnings are the government's to tax, take or otherwise redistribute however it sees fit. Why must every mention of making money be couched with an apologetic promise to give it away to those who haven't earned it? I'm neither a Republican nor a Democrat, just an honest, hard-working American looking to make a buck. And when asked a very simple question, it's too bad that even with all their focus groups, hand-holding and calculated spin, the major presidential candidates can barely muster a single talking point that is supportive of capitalism, let alone the hedge funds whose beneficial influence makes markets around the world more efficient and sound. It's also disappointing that, thanks to unconstitutional regulation that prohibits hedge funds from being sold or understood by the public, journalists like Brian Williams are able to drum up the backward conspiracy theories that hedgies are ripping off the little guy, somehow getting rich at the public's expense. He, along with the leading contenders for the highest office in the land, should know better. Let's hope they learn.