Hedge Funds - Hypothetical

Bradford is a senior manager at a hedge fund, specializing in political elections. He reseraches which candidate is likely to win, and why, then constructs a compatible investment strategy (e.g. in the year 2000, Bradford invested in both oil and renewable energy, reasoning that oil stocks/futures would go up if Bush won, and renewable energy stocks/futures would go up if Gore won).

Surprise is key to Bradford's success. If others knew he was going to move $500 million into the oil market, others would buy first, and advantage off of his research.

This year Bradford was monitoring elections, and saw some quality candidates with disorganized campaign managers. So he decided to get involved. Bradford decides to help Clancy, who is running for Mayor of Metrocity. Clancy has openly stated that he would support the development of a gold mine on the West side of town. This controversial project is projected to lower gold prices.

Bradford starts to donate to Clancy's campaign, and provides expert strategies for free.

Clancy's thought process: he not only does not need to report his associated with a hedge fund, but he cannot report this association because hedge fund's have the SEC-given right to keep their investment strategies confidential.


DISCUSS....

Hedge Funds - Background

Hedge funds are managed investment funds that are only lightly regulated by the SEC. To take advantage of this lack of scrutiny, hedge funds can only manage money for the wealthy (e.g. they set a minimum enrollment investment at $1 million or more). The rationale is that the SEC does not need to monitor hedge funds, because hedge fund investors can afford to lose their investment.

Furthermore, the light regulation is justified by the argument that hedge funds' free reign attracts investors, which in turn lifts the whole market. Hedge funds manage approximately $1.4 trillion in the U.S. market, accounting for about 5% of all assets in the US, and about 30% of stock-trading volume in US markets. (Wall Street Journal, Jan 29, 2007) See: http://users1.wsj.com/lmda/do/checkLogin?mg=wsj-users1&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB115394214778218146.html%3Fmod%3D2_1154_3

(Here is an interesting map of global asset distribution (originally, Wall Street Journal, Jan 10, 2007): http://bigpicture.typepad.com/comments/2007/01/worlds_assets_h.html)

Hedge Funds - Controling Political Agendas?

Spitzer is regulation-shy:
http://online.wsj.com/article/SB116951629735584431.html?mod=rss_law_page

Cerberus (an established, large hedge fund) is connected to Dan Quayle and the Bush administration:
http://en.wikipedia.org/wiki/Cerberus_Capital_Management

Madeline Albright is even working for a hedge fund:
http://dealbook.blogs.nytimes.com/2007/01/23/washingtons-hedge-fund-shuffle/

And Chelsea Clinton is too...
http://www.msnbc.msn.com/id/15549672/

Hedge Funds - Food for Thought

....if hedge funds cannot protect their investment strategies from the public, they are less attractive to investors, and $1.4 trillion could go overseas, or into conservative investments, dragging down the entire U.S. market economy. However, politicians are our only protection from crazy egos that double down on natural gas. So shouldn't politicians stay away, far away, of that big money pile with no paper trail?...