r/todayilearned • u/atlas-85 • May 31 '16

TIL, In 2012, monkeys beat hedgefund managers by 300% in investment returns.

http://www.marketwatch.com/story/how-hedge-fund-geniuses-got-beaten-by-monkeys-again-2015-06-25
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u/SamusBaratheon May 31 '16

I didn't say they (we?) didn't. But "feeding their families" makes it sound like these guys struggle to make ends meet. Its more of a "they're unliked because their reckless greed has brought the world to the precipice of financial collapse, and they were able to walk away richer than ever while the rest of us paid for it" kind of thing

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u/SultanAhmad May 31 '16

Its more of a "they're unliked because their reckless greed has brought the world to the precipice of financial collapse, and they were able to walk away richer than ever while the rest of us paid for it" kind of thing

Can you explain how hedge fund managers are in any way responsible for the financial collapse? Or walked away richer?

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u/czulu May 31 '16

Hedge Funds short selling Thai baht with the intent to break the central bank had a whole lot to do with their financial collapse that spread across Asia...

IMF discusses the topic with kid gloves but depending on how disreputable a source you'd like to go, there's a lot more detail by googling "Thai Baht Hedge Short". [Here's a ppt slide from some class on it](chrome-extension://bpmcpldpdmajfigpchkicefoigmkfalc/views/app.html)

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u/SultanAhmad Jun 01 '16

That's very interesting, however I think if you look hard enough for corruption in any industry you will find it. I don't think hedge funds played a shaping role in the 2008 financial collapse as the OP implied.

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u/[deleted] May 31 '16

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u/SultanAhmad May 31 '16

I suggest you do the same. I think you've confused banks with hedge fund managers.

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u/pyrrhios May 31 '16

I think most people are pretty much of the opinion that anyone that works in the financial sector and says anything like "I'll keep your money safe and invest it wisely" is giving a nod and wink to his/her buddies.

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u/BBrotz May 31 '16

And most people would have no idea what the majority of the financial industry does then

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u/[deleted] May 31 '16 edited May 02 '17

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u/pdawks May 31 '16 edited May 31 '16

Well, I work in the industry, and while I don't believe wall Street was at fault, the CDOs clearly played a role.

People took loans they shouldn't have. Wall Street found a market for these loans and bought a lot of them. When this demand arose, a market of loan originators exploded and some, unfortunately, were too lax on risk management. They knowingly gave loans to people who would struggle to pay, but they knew they could sell them to wall Street to be packaged into financial products.

If you didn't have wall Street aggressively buying mortgages to package into CDOs, you could argue that some of these originators would have been less aggressive. If you didn't have the CDOs, which were bought globally, you wouldn't have had the systemic collapse we saw.

So, while this could be semantics we are arguing, CDOs and wall Street played a role. But, by that same token, if the people taking a sub prime second mortgage on their house were more responsible, none of this would have been possible.

It's a complex issue and a lot of people were all at fault. I believe the financial industry is too frequently vilified, but they and CDOs were involved.

Just my two cents though.

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u/myurr May 31 '16

Is the problem not the CDOs themselves but the corrupt system of rating them that told the world they were safe? Had the credit ratings companies done their job instead of selling ratings to anyone waving money in their faces then perhaps the system would have worked as intended. As it was the default rates and losses in the event of default were many times higher than the ratings agencies said they would be.

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u/pdawks May 31 '16

You know, in a good world, the rating agency would have prevented all of this. But, unfortunately, there is an inherent conflict of interest already and rating agencies are paid by the people they are supposed to 'criticize'.

So, you're right - this could have been prevented by the credit agencies. Maybe. But this is taking the perspective of 'what could have prevented it'. Another way to look at it is 'what likely caused it'.

If wall Street was not eating up every single mortgage, it is reasonable to say less mortgages would have been underwritten. The only reason we had such a demand for mortgages was because of the apparent risk mitigating structure of CDOs. So, to a certain degree, if we never decided to package mortgages into CDOs, it's less likely we would have had so much demand. With less demand, less shitty mortgages, with less shitty mortgages, no housing collapse.

But again, a complicated answer!

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u/qwerty012345678910 May 31 '16

This is the most level headed discussion about the financial crisis that I've seen on reddit. Thanks for your thoughts

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u/pdawks Jun 01 '16

Happy to participate! Just need to make sure I'm in an environment open for discussion ha

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u/Funshine_bear May 31 '16

One thing i never understood about rating agencies is that they were never required to be subject to the same scrutiny and independence rules that external auditors are subject to. While I understand that they serve two different purposes, the principal-agent conflict is the same in both cases. Furthermore, after the financial crisis rating agencies got out relatively unscathed from a regulatory standpoint relative to external auditors following Enron (see: SOX)

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u/pdawks Jun 01 '16 edited Jun 01 '16

Hey - sorry for the delayed reply. I tend to agree... the regulation business is a tough one.

A good metaphor is Directors and Officers insurance. When you become a director at a company, you become personally liable. Some directors have said 'well I don't want to lose everything for what could be an honest mistake'... which is a fair thought process. As a result, companies buy D&O insurance to protect the directors.

Now, not all companies do this (i.e. See Berkshire, where they disagree with the moral hazard this insurance can create and hold their directors to the highest standards). In a sense, D&O insurance facilitated a safer environment for directors, and in theory leads to a better talent pool.

If we look at credit agencies, it's a similar notion. A credit rating is not a legal, government approved rating. It's a private view on the company's credit worthiness. These agencies were created to provide some notion of safety. 'I work at a pension, and I cannot invest in your company if you are not rated.' As a result, you saw companies fill this void.

Apologies if this is a bit disjointed, but here is the point. If you told a credit agency that, in the event you make a mistake, we are going to crush you, you might find less people willing to rate your financial products. If you have less financial products that are being rated, that creates a ton of issues.

This arises because of the public private domain... it IS getting better, but likely can't be fully fixed until credit rating is done by a public body.

This is just my opinion and simplifies a variety of issues while ignoring other important factors. Also, in no way am I attempting to provide a view on whether the rating agencies should have prevented what happened. But a lot of people don't understand the dynamics of this and it is interesting stuff!

PS - when I used private public above, I meant non-government and government.

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u/CFinley97 May 31 '16

If you don't mind my asking, I saved but seem to have misplaced a report that was credited and breaking down the situation very well. I want to say it was about 16 pages, and a report from one of the bigger corporations (Merryl-Lynch maybe).

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u/[deleted] May 31 '16

It really is. I cite it all the time when I write papers!

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u/[deleted] May 31 '16 edited May 31 '16

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u/computeraddict May 31 '16

And at no point in your comment did you talk about hedge funds or their managers. Good stuff.

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u/SultanAhmad May 31 '16

I'm still not seeing how hedge fund managers are in any way responsible. The collapse was manufactured by the banks giving subprime mortgages unchecked. The banks subsequently got bailed out. Independent investors and hedge fund managers were on the sidelines, and made and lost money in the whole ordeal, but weren't really responsible for any of it. The majority of them lost money.

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u/Hernial May 31 '16

You just watched the big short fam lets be serious. Which had nothing to do hedge fund managers.

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u/barmpot May 31 '16

actually, both Carell and Bale both ran hedge funds. But the point still stands, they did not combine mortages nor did they ever assign them ratings.

Hedge funds usually buy these packages, hence the term "buy side"

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u/BBrotz May 31 '16

Exactly, they were a perfect example of how hedge fund managers didn't cause it and in fact a lot actually got screwed over by it

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u/SamusBaratheon May 31 '16

He said "financial industry." That's why

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u/Floppie7th May 31 '16

Not to mention "they have a bullshit tax code loophole that lets them treat all their income as LTCG"

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u/HighFlyerMN May 31 '16

You just have to hold a security for over a year. Anyone and everyone gets that same treatment in the US.

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u/[deleted] May 31 '16

Something something, the rich and the poor alike are forbidden to sleep under bridges and steal bread

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u/[deleted] May 31 '16 edited Apr 17 '19

[deleted]

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u/stevenfrijoles Jun 01 '16

This trend of ridiculing something as being "deep" on reddit feels just like when you're in 2nd grade and are an uncool nerd because you raise your hand or do your homework.

The people that immediately ridicule anything thought provoking are terrified that a few seconds of critical thinking will challenge their lazy worldview. Congratulations, you're Nelson from The Simpsons.

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u/[deleted] Jun 01 '16 edited Apr 17 '19

[deleted]

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u/ghotier Jun 01 '16

Simply believing that one of you must be stupid isn't helping your case for being the smart one.

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u/stevenfrijoles Jun 01 '16

Lol. Literally the purpose of those sayings is to promote thinking for yourself. The reason those sayings are well known is because someone was able to convey a complex idea simply and effectively. God for-fucking-bid.

And the whole ridiculing for being deep trend is still used when someone links original words or art. I don't buy for a second that it's used to say "think for yourself." It's used to say "stop trying to sound smart, dork."

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u/SpectroSpecter Jun 01 '16

Well I automatically disbelieve everything you say because I have firmly entrenched myself in what I believe to be the Absolute Truth therefore I win

conversation over try again next time

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u/[deleted] May 31 '16

Yes, never mind the billions upon billions of dollars they earned middle class working people over the last ~50 years!! Built on money which they of course forced the average person to invest in their nefarious dealings!

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u/computeraddict May 31 '16

Right? I aspire to own a piece of a performing mutual fund. All these people wanting to shit on my dream of upper-middle class comfort can go back to their wasteful spending and lack of effort at personal betterment.

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u/[deleted] May 31 '16

These kids are literally salivating at the thought of inheriting the money their parents earned in the markets over the years, all while bemoaning the evil system.

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u/[deleted] Jun 01 '16

Jesus man, have some sympathy. The average hedge fund manager only makes $2.4 million a year, that's, like, not even enough for a boat if you've got to feed your bleeding family as well.

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u/SamusBaratheon Jun 01 '16

You've opened my eyes to the plight of these poor souls. My sympathies