Hedge Funds Defy The Opposite of Human Nature and Make Money Still

The top hedge funds continued to do well, leapfrogging the disaster of 2008 that knocked many smaller or less adept firms out of the business. 2009 turned out to be a very good year largely due to some funds buying when others were to afraid to take a risk. Even now with the signs of the economy perking up, a few average minded citizens we know well remain transfixed to the idea wide collapse, drinking from the elixir of fear peddled by certain conservative and religious minded leaders, leaning in their minds to buying gold or growing their own vegetables... and despite the continued existence of stocked shelves at the supermarket. That's how it goes though as people rubberneck through economic life, looking sideways and back.

The journalists are often no better, unable to predict, and pointing out the obvious when it hardly matters.

The Lazarus-like recovery of the nation’s big banks did not benefit just the bankers — it also created huge paydays for hedge fund managers, including a record $4 billion gain in 2009 for one bold investor who bet big on the financial sector.

(N.Y. Times)

The error here was to assume that the industry was dead or dying to begin with.

We on the other hand are blessed with wisdom, but cursed with no money and a deep affection for waisting what little we do have on inconsequential things (like food). But we did note a while back that Wall Street would continue to function, and that people who work with money will continue to work with money in whatever permutation necessary to get the job done. Indeed to predict such is hardly wisdom, but rather an observation of the nature of man exerting itself. That anyone imagined hedge funds would fade or disappear or have to reduce compensation indicates a clear and present lack of understanding of what makes many men tick. The general reporter remains in the habit of lumping all things together, thus missing the answers hidden in the distinctions.

In the case of hedge funds, what you basically are talking about is going to work with your friends in an office of your own design and choosing, in the location of the world you prefer, and where you will be paid untold sums of money, and can hire whomever you like, and where your staff can skew beautiful or extremely attractive (provided your traders and systems are top notch), and you answer to nobody. You can set your own hours, but probably like the locale, the office, the people, and the challenge of running your own ship in a world filled with slave-like devotion to things that either don't pay well, or that you don't believe in.

Hedged out, you sit in your Minneapolis lake office watching the wind surfers; you are in your Manhattan 20th floor corner office glancing at the skyline or hustle below; from the medium sized trading room in your Connecticut office you hear the sounds of ducks barking on the lawn. You smile.

What will we have for lunch? You are in Princeton and there is an independent little shop that sells baked goods and gourmet sandwiches... roasted duck with this hickory cheese that you just love. You and your crew tell the support staff to call in your order. Next month is the meeting in Bermuda for the international investors in your offshore fund, and then the company retreat in South Carolina. You contemplate whether the offices in Virginia, London and Hong Kong are enough, or whether to add another in Switzerland, Singapore or Shanghai.

All the while, no matter what the geographical location, or what you are eating, or how beautiful the locale (and the locales are always beautiful because you can do your business anywhere),  you are the master of your fate, with the challenge every day of making enough money to remain master of your fate. The rewards are numerous, but actually making it to the lofty level of those like Steve Cohen in Connecticut or James Simons on Long Island is difficult. But it's a challenge that many men will joyfully take.

Which is why there should not be any shock or surprise about the continued "business as usual" in the hedge fund and financial world.

Often these revelations of pay bring outrage, since people don't really understand the structure of the businesses in question, and often assuming they are like banks, or are somehow utilizing public money. Bottom line is that these are people playing with their own money and deserve whatever rewards they can muster. The only real issue is one of taxation, and whether the huge gains should be taxed as ordinary income, and whether any changes should apply to partnerships at large.