PART I: What are hedge funds?

Like any industry that charges high fees, Wall Street has its share of cryptic language to add mystery to what is actually a straightforward business.  In the current economic environment, which almost no one forecast, hedge funds have been identified as the principal culprit behind the mess.

So what’s the deal?

Hedge funds are managed pools of investment assets like a common mutual fund with a few key differences:

Mutual Funds:

• Have a tightly defined investment objective, such as energy stocks or investment grade corporate securities.

• Own securities. They don’t short  — sell shares they don’t own in hopes of buying them back at a lower price.

• Charge a fixed annual fee (around 1.25% of your investment for a stock fund), regardless of the performance of the fund.

• Are allowed to advertise.

• Are allowed to accept investments from anybody.

Hedge Funds:

• Generally have a wide and flexible investment objectives.

• Can own or short almost anything in the fund, including stocks, bonds, currencies, real estate, commodities and derivatives.*  Hedge funds also borrow money to increase the size of their bets.  That means, if they like stocks, but only have $1 million of investor capital, they can borrow money from banks to buy more stocks - sometimes as much as 10 times their investor capital.

• Typically charge an annual investment fee of 1 to 2 % of your investment and, in addition, get to keep 20 percent of the net investment return for themselves.  Often, the fund managers have a significant amount of their own money invested in the fund.

• Are not allowed to advertise.

• Most hedge funds in the U.S. are registered, which means they are regulated by the SEC and can only accept money to manage from very rich folks or institutions such as pension funds, insurance companies or university endowments.

What’s their track record?

The history of the hedge fund industry has been pretty good, on average.  Year after year, hedge funds have significantly outperformed stock mutual funds.  Even this year, when the stock market is down 40 percent so far, hedge funds are down 15 to 20 percent, as an industry …

Not great, but certainly better than stock mutual funds.

The notoriety surrounding hedge funds stems from:

• their private nature. Unlike mutual funds that publicly report their securities holdings every three months, hedge funds divulge little about their investment strategies.

• their sometimes aggressive behavior vis a vis companies in which they invest.

• the extremely high compensation that can accrue to a successful manager with a large fund. There are instances of individuals making over $1 billion in a single year. This level of compensation arises from the 20 percent of the net performance fee that funds retain at the end of the year. Of course, investors received the other 80 percent of the return.

Finally, of course, hedge funds do blow up from time to time.  When you use any kind of leverage or borrowing to amplify the returns in a fund, it is possible to lose all of your investors’ money if your bets are incorrect.  Most famously, LTCM, a large hedge fund founded by Nobel prize winners  had to be rescued in 1998 by a consortium of banks organized by the Federal Reserve.

———————-

* Derivatives are merely financial contracts whose value is based (derived) from something else, like a stock or a bond.

Example:  Today (written on November 7) Assume Johnson & Johnson (JNJ) is trading at $60.00/share.  If I think that by 12/20/08 (43 days), JNJ will be trading at $65.00/share, I can buy a call option (derivative) that entitles me to buy JNJ on 12/20/08 at $65.00, regardless of where it’s actually trading on that day.  I can buy that option today (11/07/08) for $0.95/share.

If I am right and the JNJ stock trades above $65.00/share on 12/20/08, I take my call option and $65.00 and get one share of JNJ. (The stock will have to trade above $65.95/share for me to make money because te call option cost me $0.95/share.)

If I am wrong and the stock trades below $65.00/share on 12/20/08, the call option becomes worthless, and I lose my $0.95.

My husband and four kids chattered and laughed as we neared the rendezvous point with the dog sledding outfitters, but I kept quiet.  They were eager to try this new winter activity.  I was not.  I don’t like to get cold, and I don’t like taking risks.

My thoughts also kept returning to our 14-year-old daughter. We’d left her behind at the guest ranch where we staying over the holidays.  She was recuperating from a skiing injury and couldn’t be bumped around without renewed pain.  She was content to remain at the lodge, watching movies and sipping hot chocolate, but I hate our family to be separated.  I hadn’t descended into an evil mood, but I wasn’t in a happy, spunky one, either.

We reached a snow-covered parking lot where about 20 dogs, all chained to a beat-up truck, barked, yipped, whined and yapped.  One of the larger dogs (or, maybe, a half-wolf) sat down on his haunches, tilted his head back and howled into the clear blue western sky.  The yellow-brown fur on his back hung off in mangy patches.

In fact, not one of the dogs looked like it could star in “Balto” or run more than 100 yards, although they made such a racket my head ached.  They were small, skinny and seemed to be an underfed bunch of misfit mongrels.  We kept a nervous distance from the pack and held back our excited 3 year old, Lynne, who wanted to pet the doggies.

Chris, the owner of the team, strode over and introduced himself to us.  Well over six feet tall, he loomed over our family huddle. He wore a huge down parka with its fur-trimmed hood pulled up over his head.  Appropriate because the temperature was only about 10 degrees.  He told my husband Dwight the dogs were Alaskan huskies that could run up to 150 miles a day.

I kept my doubts to myself about the dogs’ strength and stamina. I consoled myself that if we rode more slowly, we would ride more safely.  Although we might freeze to death.

Chris had a helper who looked like he had just crawled out of one of Steamboat’s bars after a long night.  We nicknamed him Sleazy.

Chris and Sleazy began to unchain the dogs from the truck one by one.  The men grabbed the dogs by the scruffs of their necks and collars, and then they half-ran, half-dragged the dogs on their two hind legs up to three sleds waiting at the trailhead and buckled the dogs into their sled harnesses.

I thought that sled dogs would instantly obey their masters’ verbal commands and leap into their assigned slots.  These dogs jumped back and forth over chains and harnesses and each other while they fought, became tangled, and continued to yip, bark, howl, yelp, and whine at an unbearable decibel level.

I turned to Dwight in astonishment as Chris gestured first at me and then at one of the sleds.  “I’m driving?  I thought I was just going to be a passenger!”

“Guess not!” he said and grinned.

Over the cacophony of the dogs, we sorted ourselves into the three staked sleds with six dogs each.  I stood on the runners of one with our son Troy, age 9, wrapped in a blanket and cocooned into the zippered sled seat below me.  Dwight was our toddler Lynne’s driver.  Tyler, 16 years old, was the musher for his sister Clare, age 12.

Chris yelled simple driving instructions at us:  “Stand on the runners while moving.  Take one foot off the runner and place it on the center rubber mat to slow the dogs down.  Put both feet on the metal claw brake to stop the dogs. ”

He added, “The only tricky part of this trip is getting over the bump onto the trail.  Once you get going, we’ll stay out of sight with the snowmobiles.”

I was looking at my feet, figuring out their placement, trying to absorb the information and worrying.

Chris screamed, “Go, Susan!” as he unstaked my sled and freed the dogs to run.

At once, the dogs jerked forward.  My heart pounded as we careened over the bump onto the trail.  Immediately, the sled lurched to the left and began to skid along on its side with Troy still zipped tightly inside.  I fell off the tipped sled, scrambled to my feet and raced after it.  I caught up to it, grabbed the handle and threw my weight against the sled’s forward motion.  The dogs slowed, stopped, then burst into barking, howling and yelping again.

“Are you all right?” I screamed to Troy.

“Fine,” he answered with a huge smile.

Chris appeared beside me on his snowmobile.  A little late, I thought.  But he righted my sled, and we set off again, this time without incident.

Dwight and Tyler steered their sleds onto the trail without difficulty, and our long, cold, 13-mile ride along the North Fork Trail started.

The dogs ran along, now blessedly silent.  But they did not run smoothly and cooperatively, as I had imagined they would.  They ran raggedly.  Some trotted along evenly with their tails erect and their harnesses tight, pulling the sled.  Others scrabbled along on a diagonal line, tails drooping, bumping into their paired partner or the powdery bank along the edge of the trail.  My largest dog jogged erratically, vaguely contributing to the team-pulling effort.

Chris and Sleazy zoomed by us on their snowmobiles.  The dogs picked up their pace as the vehicles passed, then resumed a ragtag lope.  Now that I felt calmer, however, Troy and I chatted a bit.

We rounded a corner and found Sleazy parked next to the trail.  “We have to wait for the third sled,” he announced.

I felt confident enough to turn around because I was fully stopped with all my weight loaded onto the brake.  I saw Dwight and Lynne a short distance behind us, but no sign of Tyler and Clare.  My heart began to thud again, but then I spotted their sled cresting a small hill.  Their dogs were barely loping.

Chris (Where had he been?) joined Sleazy, and we all waited for Tyler and Clare to catch up.  Chris and Sleazy shifted around a couple of dogs to better balance them and told Tyler and Clare to lead now.

Again, the men zipped ahead on their snowmobiles.  The 18 dogs showed a brief spark of pep, then settled into their trademark sloppy pace.  Only now, with the two kids in the lead, I had to ride my rubber brake.

Tyler and Clare’s dogs stopped as soon as the trail began to slope uphill, turned around and looked at the kids, then stood around and sulked.  Tyler hopped off the sled, ran along beside it and yelled at them while holding onto the handle.  The dogs sped up for a few moments, then slowed again and again.

My hands and feet felt frozen and began to ache.  We were moving so slowly that I was standing with one foot on the runner and one foot on the brake to stay a reasonable distance behind the kids’ sled.  Ty and Clare yelled and groaned at their team.  Troy and Lynne, well bundled and comfortable, promptly fell asleep.

Sleazy popped out of nowhere and hollered at Ty and Clare not to yell at their team because their dogs were the youngest and most inexperienced.  I began to wonder if this expedition would end before I had frostbite.

After a long ride, we reached the trail’s turnaround point where Chris and Sleazy awaited us.  Chris grabbed the lead dogs of Ty and Clare’s sled and guided them easily around the smoothed loop.  Sleazy tugged my dogs into the powdery rough center of the turnaround, and my sled began to tilt, reminiscent of the journey’s start.

“Lady, get off the sled and push!” Sleazy hollered at me.

“I’m not feeling good about this!” I shouted, but no one was listening because Chris had allowed Clare to clamber onto her sled without loading anyone into the seat.  Her dogs (the same ones that had crept up the trail) now felt less weight and no restraint. They began to rocket homeward along the trail as fast as they could.  Chris sprang forward in an Olympian dive, and his bulk halted the dogs in their tracks.

Simultaneously, Dwight’s team spotted their buddies headed home and simply doubled back, parallel to their own sled, but facing the opposite direction and began to pull toward home, too.  Out of the corner of my eye, I saw his sled tipping over with Lynne in it, and I began to scream in panic, although Dwight remained calm and quickly regained control over his dogs.

Somehow, we all got straightened out, despite Sleazy.  Ty took over my sled as Troy’s driver; I climbed into Clare’s sled, gratefully pulled the blanket over me, and zipped the covers up to my nose.  Dwight had righted his own sled, and he and Lynne were underway.

We headed off downhill.  The dogs skidded along, eager as I was for this trip to be over.  Ty and Troy sped ahead.  Back at the ranch, Tyler told me that when he got out of the snowmobilers’ sight, he reached down into the sled, hauled Troy out onto the runners and let Troy drive, too.  Clare drove confidently, but I felt anxious because we were stuck with the sideways-leaning lead dog that kept pulling the other lead dog off course.  Precipices loomed next to us.

Clare complained about my back sled driving and mocked my fears about falling off the cliffs.  Dwight continued to guide his sled with unflappable insouciance.  When his sled neared ours, I shouted, “Is Lynne OK?”

“Still sleeping,” he responded calmly.  When Lynne did awaken, very near the end of the trip, she waved gaily at Clare and me. Her little bundled face beamed out at us from her covers.

As we approached the long, gentle downward slope at the end of the trail, I could see Ty and Troy in the distance.  From afar, their dogs appeared to pull gracefully and evenly. We were going to survive this adventure safely after all.  I relaxed and appreciated the magnificent beauty of Colorado.

Deep, powdery white snow sparkled under the morning sunlight.  The Rocky Mountains crested magnificently all around us.  We were alone with nature, no other humans in sight.

At that peaceful moment, our largest dog, without any fuss, opened his mouth and spewed yellow vomit all over the trail.  The other dogs, ignoring his issues, continued to run and simply dragged him onward to the trail’s end.

At long last, our family dog sledding trek was over.

I was sent this tale before the election:

BAR STOOL ECONOMICS

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.

If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that’s what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.

‘Since you are all such good customers, he said, I’m going to reduce the cost of your daily beer by $20.

Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free.

But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share?’

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.!

And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

‘I only got a dollar out of the $20, ‘declared the e sixth man. He pointed to the tenth man, ‘but he got $10!’

‘Yeah, that’s right,’ exclaimed the fifth man. ‘I only saved a dollar, too.  It’s unfair that he got ten times more than I!’

‘That’s true!!’ shouted the seventh man. ‘Why should he get $10 back when I got only two? The wealthy get all the breaks!’*

‘Wait a minute,’ yelled the first four men in unison. ‘We didn’t get anything at all. The system exploits the poor!’

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics, University of Georgia
For those who understand, no explanation is needed.

For those who do not understand, no explanation is possible

Here’s how I responded:

I understand this example and also this that this is the point you are making about Obama’s campaign message.  The truth and risks inherent in the conclusion cannot be ignored — that if the system creates too many disincentives for work, savings and investment, entrepeneurs and wealth may flee.  But it is also an oversimplification.  Neither Buffett nor Gates needs to live in the U.S.  They didn’t inherit their wealth, but they still feel obliged to give back, to help others climb the economic ladder.  Where does that motivation fit into the bar story?  The ideal is to create lots of opportunities for everyone in the system, have a progressive system of taxation and work ceaselessly to inspire a belief in a national community and a commitment to the public good.

Please read Tom Friedman’s editorial in The New York Times today about “the Buffett effect!”

http://www.nytimes.com/2008/11/05/opinion/05friedman.html?ref=opinion

Reaching across the aisle, yet apt for this big election day!

Whatever America hopes to bring to pass in the

world must first come to pass in the

heart of America.

- Dwight D. Eisenhower

Last week, Dwight and I attended a talk given by Jack Shonkoff, founding director of the Center on the Developing Child at Harvard, www.developingchild.harvard.edu.  The center, which is only two years old, combines Harvard’s multidisciplinary expertise to study child development, then uses the knowledge gained about the developing brain and human genome to impact policy decisions on behalf of children and families.

Shonkoff spoke about three numbers:  700, 18 and 3 to 1.

Seven hundred is the number of synapses built per second in the brain in the first few years of life.  This process can be thwarted if a child is exposed to toxic levels of stress — abuse or neglect, for example.

At eighteen months vocabulary differences start to show up between the children of college-educated parents and children whose parents did not attend college.

By the time children are three years old, the vocabulary of children with college-educated parents is three times larger than the the vocabulary of children whose parents did not attend college.

I was astonished by the implications of this research.

Preschool programs for three year olds already confront huge differences in the language skills that children possess.

How do we help families and children overcome this huge 3 to 1 achievement gap that already exists at age 3?

Several people have e-mailed me about the religious topics I wrote about in earlier posts.  Here are  their comments (which I am adding anonymously for the moment, but can attribute later, if so desired):

Simchat Torah

You caught a glimpse of Simchat Torah (in yiddish, simchas toirah), which celebrates the completion of the reading cycle of the Torah.  It takes a whole year to read it.  The holiday begins with staying up all night in joyful study and discussion, then dancing in the street with the Torah.  Then the cycle starts over, with the beginning of Genesis.

St. Anthony

Saint Anthony is the saint you pray to when something gets lost.
In my Catholic marriage, whenever I lost something, I asked him for help never quite believing it mattered but the missing object always turned up.
I used to constantly lose my Tiffany watch, and it always reappeared - once even in my underwear drawer.
After my divorce from the Irish Catholic and my return to the Episcopal Church, I lost that watch again.
“Saint Anthony, I need your help one more time.”
Another Irishman, Dan O’Connell said, “Ah, you’re not one of us anymore. Saint Anthony can’t help you.” We both laughed, but………………..
The watch was never found.

. . .

Did no one mention the quick prayer often said: St.Anthony, St. Anthony look around, something is lost and can’t be found. And  I really do know several non Catholics who pray to St Anthony to intercede when something is lost.  In Bergen County there is an Episcopalian Church called St Anthony’s and several churches which are not Catholic hold blessing of the animal ceremonies in remembrance of St Francis who called and treated all of God’s creatures as his brothers and his sisters regardless of their religious denomination.

Please note:   If you write a comment, I have a chance to review it before it gets added to the post, so that I can filter out spam.  So don’t think that if you add a comment and can’t see it immediately, you haven’t succeeded in commenting!  And I hope you will add your comments — lots of them!

Yesterday was a glorious, breezy and clear autumn day in the New York metropolitan area.  Dwight and I decided to leave New Jersey behind, head into Manhattan, walk across the Brooklyn Bridge and explore Brooklyn Heights.

We strolled along the Brooklyn Heights promenade, looking back across the river and admiring the view of lower Manhattan and the Statue of Liberty, or the “pretty French girl in the harbor,” as my father called her.  Meandering through the neighborhood streets, we came upon a rabbi, standing on the shoulders of another man and dancing with the Torah, surrounded by his flock. 

We decided to stop for a glass of wine at one of my all-time favorite restaurants, the River Cafe, before we headed home to  meet the kids returning from school.

The River Cafe nestles under the Brooklyn Bridge and overlooks the mesmerizing, roiling East River.  As we sipped our wine and gazed at the water, a NYPD  boat zoomed around the tip of Manhattan and stopped just south of the bridge.  A police helicopter appeared and began to hover over the bridge.   More police boats appeared and anchored north of the birdge.

“Uh, oh, this is starting to remind me of our Fourth of July,” I said to Dwight.

The young bartender glanced out the huge plate glass windows overlooking the river and remarked with no apparent interest or concern, “Must be a jumper.”

We finished our wine and walked back onto the Brooklyn Bridge’s wooden pedestrian pathway, above the roadway for cars traveling back and forth between the two boroughs.  But now, all was quiet beneath us.  Police had stopped traffic in both directions.  I took my camera back out of its bag and hung it around my neck.  A stream of people headed off the bridge, returning to Brooklyn, walked toward us.

“Hey, good pictures up ahead,” a young man told me, “there’s a jumper on the bridge.”

We picked up our pace and reached the spot.  The police had already talked the man, who wore a striped knit cap, off the bridge’s high, arching cables.  Four policeman were lashed to the man, who leaned on one of them. The silent group edged back slowly toward a walkway at the end of the cable.

“Stay with me, Favio,” one of the policeman said. “You’re fading on me,” he added, as the man slumped and his feet slipped off the cable.

“He’s od’ing on something,” the Daily News photographer, who was standing next to me, said.

Carefully, patiently, the NYPD maneuvered him back to the walkway

and lowered him to the team of men waiting below, standing on an ambulance.

The police worked smoothly and calmly as they handed Favio over to the waiting emergency medical responders.  The rescue team descended from the walkway, looking grim and thoughtful, not full of high fives and high spirits.

The chance intersection of our lives with Favio’s brought the afternoon to a serious and sobering end.  Hopefully, Favio will survive and find renewed hope and reasons to celebrate his life on this beautiful earth.

WOO HOO!     LOVE, SUE

For the past three years, I’ve written stories for Manhattan Media’s annual blackboard awards.  I have a terrific insider’s view of the amazing diversity of educational opportunities in New York City.  I visit the schools and interview administrators, teachers, parents and students.

This year, I wrote about four schools:

The Hewitt School – a private K-12 girls school on Manhattan’s Upper East Side, just off Fifth Avenue.

http://westsidespirit.com/?p=410

St. Joseph’s School - Yorkville — a Catholic K-8 school, also located on the Upper East Side.

http://westsidespirit.com/?p=408

United Nations International School, Queens — a private K-8 school that is part of the United Nations International School (K-12) located in Manhattan.

http://westsidespirit.com/?p=404

Hannah Senesh Community Day School — an inclusive  Jewish private K-8 school in Brooklyn.

http://westsidespirit.com/?p=398

Here’s the link to my third and last story from the Association of the American Army (AUSA) annual meeting that was held in Washington, DC last week:

http://www.ausa.org/news/latestnews/NewsArchive_2008/Pages/FamilyForumThreeMoreResearchNeededonImpactofDeploymentsonChildren.aspx