This weekend, I found myself in the rather unusual position of defending hedge funds. Before I explain why that is so unusual, allow me to explain what I was defending them against.
Last week, Forbes released its annual score card of top-earning hedge fund managers. The usual gang was there: Soros, Tepper, Cohen, Paulson, Icahn, Simons, Dalio, Griffin, et. al. That clickbait scorecard -- it worked on me -- led to a strident column from Gawker, bizarrely titled "Fund Managers Are the Biggest Gangsters of All." Noting that the top 25 managers made a combined $24.3 billion in 2013, Gawker concluded, “The biggest thugs of all operate fully within the law.”
Which is completely and utterly wrong. The real gangsters were the “Banksters” who helped bring down the economy in the financial crisis, along with their lapdogs in Washington. To literally talk my own book, "Bailout Nation": If you want to see truly thuggish behavior, look at three decades of radical deregulation, plus a gutting of enforcement mechanisms.
To conclude that hedge-fund thuggishness is the problem is not only erroneous, it's weird. Critics of hedge funds have an embarrassment of riches to select from when critiquing the 2-and-20 crowd; I say that despite the fact that some of my best friends manage hedge funds. Why go places that are not supportable, other than to create an outrageous headline? The Epicurean Dealmaker pointed this out in language that would make my editors here at Bloomberg View blush.
No, hedge funds are not what that brought the world to the edge of the abyss. The 25 biggest earners are not the prime movers of inequality in America. Of all the things one can legitimately complain about, let me suggest starting with the non-transparent, overpriced, under-performing gated funds that so many institutional investors are so heavily over-weighted in. These include public pension funds of teachers, firefighters, police officers, etc. that should really be in a much simpler, more cost-efficient asset allocation model.
That legitimate complaint against the hedge-fund industry has been gaining traction the past few years. Simon lack’s book, "The Hedge Fund Mirage," puts the details into such painful relief that it is almost comical. Lack is not the usual hedge-fund critic, sniping from the sidelines. He spent most of his career at JPMorgan Chase, allocating billions of dollars to the universe of emerging fund managers. He is like a professional chef telling you what dishes you should skip in a famous restaurant.
I met Lack this past summer at the Trustee Leadership Forum for Retirement Security conference at the Kennedy School. My presentation to the group, titled Romancing Alpha, Forsaking Beta, discussed a myriad of reasons that public pension funds should radically reduce their overweight hedge-fund exposure. Thuggishness is not one of them.
There are so many things we can complain about when it comes to the world of finance. There simply is no need to concoct outrage when the reality of the situation is bad enough. Understanding the difference between illegality and the overcharging/underperformance of so many hedge funds is where the critics should be focusing.
(Barry Ritholtz writes about finance, the economy and the business world for Bloomberg View. Follow him on Twitter at @Ritholtz.)
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