Where are we now? A cyclical bull within a secular bear? Climbing a wall of worry? About to rock?
All the data guys pull out history going back to 1929 or 1934 or to wherever they've got data, and draw inferences: "there were lots of little bulls between 1966 and 1982, but the markets never went anywhere." As if there were enough data to abstract from. The whole history of market data is very short, and takes place within the context of radically changing external economic forces. Mass production was kind of a big deal, as is globalization. It changes stuff. Nobody knows what's up. They just have data, charts, pointers, and gestures.
And another thing. I'm almost ready to argue that -- just as Sarbanes-Oxley drives public companies into the arms of private equity, so Bogle and Random Walk Theory drive the hedge fund business: if a business walls itself off from disciplined data collection, nobody can prove whether it's doing a good job, in aggregate. Excessive risk-taking and blow-ups like Amaranth derive from a short-term returns focus not unlike the pressure to hit quarterly numbers that called forth all manner of creative accounting from Enron to Bristol-Myers Squibb.
Not that I would argue that we should return to the days on long-only mutual funds. But. as a middle class taxpayer, I have to think that hedge funds could stand a little more oversight.
Sunday, October 01, 2006
Cycle du siecle
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2 comments:
The lack of transparency in hedge funds in general and the inability to gauge the value of many derivatives make these types of investments inherently risky, which is okay, but also make them ripe for fraud and abuse. Capital investment introduced in this manner can destabilize entire market sectors (remember the governmental savings and loan bail-out) and regulation and oversight are long overdue.
As long as hedge funds are only losing their and their clients money, I say let them be. If you feel comfortable giving a large chunk of your cash to someone making highly leveraged bets in a market where you would probably need 20 years of data to know if you actually have an edge, and are not just a lucky monkey, then I have a few bridges you might be interested in buying.
It is unclear how regulation of hedge funds would work. Likely these Amaranth guys were running their VAR calculations along the lines of Basel II and thought they had it all under control. Except VAR limits are only as wild as the last 5 years of history, and gives a real false sense of security. Sensible folks would run stress scenarios, but those end up being very dependent on the details of what and when you trade. It would be well nigh impossible for a regulator to come up with an even approximately complete set of scenarios that would cover the array of asset classes and trading styles out there.
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