TEXT OF INTERVIEW
SCOTT JAGOW: We just learned exactly why investing in hedge funds can be so dangerous. A Connecticut fund lost about $6 billion of investors’ money this month on bad natural gas trades. Today, the Wall Street Journal said regulators are looking into the losses. Friday the fund said it will stay in business, but it’s swearing off energy trading. I asked Newsweek’s Allan Sloan what happened here?
ALLAN SLOAN: What happened here is you had a hedge fund call Amaranth that was supposed to be safe because it was doing a variety of different things and all these risks would balance out blah blah blah blah blah blah. But for reasons that aren’t clear, they let a guy sitting in Calgary, Alberta run the entire fund into the ground. And, believe me, plenty of hedge funds, hundreds of hedge funds a year die but usually no one pays attention. They key to understanding what goes on here, you’ve gotta understand how the managers pay themselves.
JAGOW: OK, how do the managers pay themselves?
SLOAN: Alright in a normal mutual fund, you know your boring index fund or my mildly aggressive stock fund, the managers get a percentage of the assets under management. And if the fund does well or the fund does badly they still get a percentage of the assets. In a hedge fund, the way hedge funds are rewarded, it almost requires, especially if you’re a new hedge fund, to take very large risks because if it works, you make a fortune, and if it doesn’t work, you walk out on the street and start again.
JAGOW: Institutional investors seem to love hedge funds. San Diego County has invested millions of dollars in Amaranth, New Jersey’s pension fund could lose a bunch of money over this. Why do these people keep turning to hedge funds?
SLOAN: Hedge funds have had a very good historical record of producing very high returns, but that’s the historical record. I mean, states and cities are really hot to make money on their pension funds because these things are way under-funded and if you don’t make the money in the investment portfolio, you’re gonna have to get it from the taxpayers. This is just an alert to tell people that it ain’t so easy and even a fund like Amaranth which on the surface looks very good, if you knew what you were doing, you weren’t anywhere near here.
JAGOW: And how about the process of regulating hedge funds. There’s been a lot of talk about that, to speed it up.
SLOAN: I don’t think so, because I mean how do you regulate this thing? To me hedge funds are for consenting adults. They’re big people, you’re supposed to know what you’re doing when you get in there. My problem is not with the hedge fund or the SEC. My problem is with the investors who weren’t paying attention. I don’t want the government out here telling me what to do on stuff like this and I’m a man who does not have any money in hedge funds because I can’t afford the $10 million minimum investment. No matter how much you guys pay me to be on this show.
JAGOW (laughing): Well it certainly isn’t $10 million. Alright Allan thanks a lot.
SLOAN: Take care, Scott.
JAGOW: Allan Sloan is the Wall Street editor for Newsweek magazine. In Los Angeles, I’m Scott Jagow. Thanks for listening. Have a great Monday.
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