Hedge Funds and ETFs

Hedge funds charge hefty fees. Because they are that good (or so they claim)! They seem to provide good returns that have little in common with the overall stock market return (S&P 500), or U.S. bond market returns. But what is the source of their returns? Is it a stream of new and ever ingenious investment ideas generated by the hard work of a hedge fund manager, or could it be some “secret formula”, discovered long ago, and run by a computer, while the hedge fund manager is now busy golfing and fishing? An example of such a strategy would be just writing out-of-the-money put options on the S&P 500 index.

I, personally, have nothing against paying high fees for truly new investment ideas, generating high returns. For example, SAC’s 50% performance fee sounds like a fair deal for “sure-thing” returns generated by insider tips (oh, if only that strategy was legal)… On the other hand, I do have a problem paying a 20% performance fee as a “royalty” to a computer running a formula discovered a long time ago. However, if nobody else on the market offers returns based on the same (or similar) formula, then I am stuck with that hedge fund. And that is exactly what the situation was until recently.

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The Future of Innovation

What better resembles the future of innovation – this or that?

Innovation is the ultimate driver of economic growth. Innovations big and small are essential for us to be better off tomorrow than we are today. However, it is also critical to sort out good innovations from wasteful ones. Good innovations then have to be adequately financed and nurtured in order to develop to their full potential. Financing potential breakthroughs in technologies “like we’ve never seen before” requires expertise, vision, and guts, as most radically new ideas may initially sound like “crazy talk”.

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Finance and the Purpose in Life

It is no secret that Main Street suspects that Wall Street high finance provides little meaningful contribution to society. Recent history suggests to a non-financial person that finance may in fact be taking rather than contributing. This opinion is expressed everywhere from Oliver Stone’s original “Wall Street” to the more recent Greg Smith’s “Why I am Leaving Goldman Sachs”. Even people in the finance industry have this nagging feeling about the purpose of life, as Matt Levine pointed out in his comment on Greg Smith’s article:

Smith is hardly the first banker to worry about whether his work makes the world a better place. Working at an investment bank involves trading off those negatives – stress, hours and a nagging sense of unfulfilled purpose – against the positive aspects of the job, which can be loosely summarized as “huge paychecks.”

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Effective Investments

The most effective investments … are investments in politics.

– Boris Berezovsky

Am I seriously quoting the late Russian oligarch about investments in politics? After all, Berezovky brazenly manipulated political outcomes in Russia for personal gain.  Am I implying that investors do the same? Not exactly… While it is certainly not possible for a typical investor to manipulate the political landscape on such a grand scale, it is possible to achieve superior returns by taking the time to understand politics in order to anticipate developments that affect all financial markets.

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True Economic Growth vs. a Pyramid Scheme

Once you start thinking about economic growth, it’s hard to think about anything else.

– Robert E. Lucas

Q: What is the difference between maintaining sound fiscal policy and running a pyramid scheme with respect to government debt?

A: It all depends on the economy’s predicted growth rate.

What is economic growth, where does it come from, and how do we measure it? These are simple questions, but it is fundamentally important to get them right in order to understand what is ahead for the U.S. economy, and how its growth relates to government fiscal policy. Here I would like to take a look at how we measure economic growth, and argue that sometimes true economic growth may not be what it seems, at least in the short term.

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On Social Norms, Rules, and Regulations

All great truths begin as blasphemies.

George Bernard Shaw

Let me start with the proverbial “Five Monkeys” story.

Five Monkeys

Start with a cage of five monkeys. Inside the cage, there is a banana hanging from the ceiling and a ladder placed under it. Before long, a monkey would go to the ladder and start to climb towards the banana. As soon as he touches the ladder, he and all of the other monkeys are sprayed with ice-cold water.

After a while, another monkey makes an attempt to reach the banana.  Again, as soon as he touches the stairs, all the monkeys are sprayed with ice-cold water. This is repeated again and again until the monkeys learned their lesson: climbing results in ice-cold water for everyone, so no one climbs the ladder.

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American Health Care – If You Were To Ask, You Can’t Afford It…

Houston, we have a problem…

There are many problems with American healthcare well documented in the popular press, but it seems that the main issue is the availability and (if it is available) the high cost of health insurance.

Let me begin by saying that the most common option in American health insurance system tied to employment is very weird. If you have a job that offers a group insurance plan, then you can join regardless of your current health and preexisting conditions. However, if your employer does not offer a group plan, or you’ve been laid off, or you are self-employed, or an entrepreneur, then you have to buy insurance on your own. In that case, you better be in excellent shape, with no preexisting conditions, because if you have health problems, then your premiums are going to be extremely high, or your particular condition is not going to be covered, or you may forget about insurance coverage altogether (if you have something really serious). This makes you think twice before switching jobs, or striking it out on your own.

I think that fixing the American health care system is, perhaps, the key issue for securing America’s economic future. As America cannot compete on wages or low-cost mass manufacturing against new vigorous economies like China or India, it is paramount to maintain America’s true competitive advantage. It is the entrepreneurial spirit and the propensity to efficiently innovate that put America in the forefront of the world’s economic development. The current system of health insurance locks people into jobs with particular insurance plans, thus inhibiting the entrepreneurial spirit of people trying new ideas and starting new companies. A truly portable health insurance independent of employment would provide the necessary mobility of talent and labor that underpins effective innovation and gives America an edge in global competition.

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An Economic Expansion That Wasn’t

In recent days my friends have been asking me the same questions that we hear on TV many times a day… What is happening to the financial markets, and is it the beginning of the end for America? Below is just my personal view on the situation.

America as a nation has enjoyed vigorous economic growth for a very long period of time, going back to the 18th century. As the economy grew, Americans got wealthier, and now we enjoy one of the highest standards of living, as compared to the rest of the world. But what drives the underlying economic growth that makes us all richer in the end? It is the process of innovation and progress that drives economic growth. It is people coming up with new discoveries and technologies that provide more “bang for the buck”, and ultimately make our lives easier and more productive. America historically has been an innovator, with inventors like Edison, Westinghouse, and Ford revolutionizing technologies that made our lives better. It is the process of innovation that lies at the core of any economic expansion. That was then…

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On Hedge Funds

What is a hedge fund?

A hedge fund is an investment vehicle that is designed to take full advantage of financial instruments, and to pursue any investment strategy in today’s markets. There is very little government oversight of the hedge fund industry. Most hedge funds are not even required to register with the Securities and Exchange Commission and can do pretty much whatever they want free of government regulation. This means that investors should be very careful in committing their money to a hedge fund – the risks could be significant, and so are the potential returns.

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