Hedge funds taking a hammering

Some Americans may be feeling a hint of schadenfreude at the news that hedge funds are having a hard time of it in this market.

Hedge Fund Research says the average hedge fund has lost 4.1 percent during August - making the month the industry's fourth worst ever.

Why should we care? After all, hedge funds are supposedly the domain of the super-rich, run by amoral banksters who'll happily lever up, manipulate stocks, invest in exotic securities from who knows where, and then run squealing to the government for a bailout when things go wrong, right?

Wrong. If you want villainize any part of the financial system, hedge funds are not your target. Sure, hedge funds can and do behave badly, meddle nefariously in the markets and invest in dodgy assets and in foolish ways. But when the hammer comes down, hedge funds are on their own.

Actually, that's not quite true. When a hedge fund called Long-Term Capital Management collapsed, back in the 1990s, the government was worried about the threat to the financial system. So it stepped in with a $3.65 billion loan fund to cushion LTCM's fall. The fund was eventually liquidated, and the loan was paid back.

Since then, no independent hedge fund has been given government support. in the 2008/2009 financial crisis, hedge funds collapsed in droves, and the government did nothing to help. The Chicago tracking firm Hedge Fund Research estimates 1471 hedge funds went under in 2008 alone.

That's not the case for the big banks and insurance companies. Once the regulators gave them permission, these institutions started doing all the risky stuff that hedge funds did. Just like the hedge funds, they ran into trouble, but unlike the hedge funds, many of them were bailed out by the government. Billions of dollars of taxpayer money was poured into the system to keep these greedy behemoths afloat, and it's still costing our economy dear.

So while you may not care a fig for hedge funds and the problems they're having right now, don't be mad at them: that's not your money they're losing, after all. The same can't be said for the banks.

About the author

Paddy Hirsch is a Senior Editor at Marketplace and the creator and host of the Marketplace Whiteboard. Follow Paddy on Twitter @paddyhirsch and on Facebook at www.facebook.com/paddyhirsch101

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