August 25, 2012

When Hedges Go Bad

In early times, hedging meant protecting something, usually crops, by surrounding it with hedges.

Today hedging means to protect yourself from losses by avoiding a commitment, usually by supporting more than one side.

People or corporations who donate to both republican and democratic candidates do this all the time. So do gamblers who bet on both teams, and investors who buy stock in competing companies. In these cases, people are seen as "hedging their bets".

Pete Rose was banned from baseball for betting on his own team. Fans were horrified to learn that he sometimes bet against the Reds while he was manager.

But really, let's be honest, what baseball team wins every night? Winning 100 out of 162 games is considered a significant accomplishment for any team.

So from a gambling perspective, it makes perfect sense to bet both for and against one team. The same holds true for the stock market, which is really just a place to bet on financial performance instead of sports rankings. Not everyone can be a winner, so it's more profitable to spread your investments around.

But hedging a baseball bet and hedging on the economy are quite different. One is a game. The other is the financial backbone of the United States of America.

This is why I have problems with hedge funds. In particular, with political candidates who employ the practice.

Consider the following from the Boston Globe regarding one candidate's financial portfolio:

"In many cases, his investments are in funds that hold complex securities and produce profits whether companies succeed or fail, and whether the economy thrives or not."

Later in the article there is this forecast from the same candidate's investment advisors:


"a flurry of new borrowing in 2010 'will fuel a robust distressed cycle over the next 2-4 years, especially if the economic recovery remains relatively weak'.”

Pete Rose bet against his own team and was banned from baseball for life.

Now we have a billionaire doing the same thing with our economy and people are touting him as some kind of financial Mr. Fix-it? 

I don't get it.







No comments:

Post a Comment