June
15Bad Guys in the Boardroom
Every day brings fresh reminders that, while many people complain that movie stars are overpaid, the folks who are really making the most money are also the folks who are losing the most money. For other people, that is.
Mutual funds are sagging, hedge funds are collapsing, yet their managers keep getting bigger and bigger paydays.
Citigroup has now shut down a hedge fund that it acquired less than a year ago because it’s lost so much value. The catch is that the fund was co-founded by Citigroup’s new chief executive, one Vikram Pandit, who personally reaped over $165 million from selling his fund to the company that just promoted him. Money guys win, investors lose.
According to The Economist the hedge fund business has mushroomed from a $39 billion caper to a $2 trillion empire in less than 20 years. Why then are investors are dropping like flies?
The secret of hedge funds is that they’re as inscrutable as the plot of an Indiana Jones sequel. As Andrew Lo of MIT notes, they deal in illiquid assets (which are hard to trade or to scrutinize) and pursue “non-linear” investment strategies. That’s a pedantic way to say that, while they may appear to be doing great, they may actually be collapsing.
When you buy into a hedge fund, or see an Indiana Jones movie, you’re not supposed to ask questions. The big difference: The price of a movie ticket is a lot cheaper.
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