Recently it was reported by the Wall Street Journal that the Federal Reserve is considering inviting hedge funds to participate in their massive “repo program”; a short term credit facility that has historically only been accessible to primary dealers (TBTF Financial Institutions).
We can only hope that this decision isn’t being influenced by the sharp increase in fund redemption’s seen last year. If it is, we should probably reevaluate the fairness in giving small groups of wealthy investors cheap loans so they can profitably exit their stock portfolios. Hedge funds are not a public utility, and if their activities are going to be subsidized by taxpayers, we should seriously consider forcing them to give us a share of the profits.
The bankers love creating offshore subsidiaries, so maybe we should utilize our own this time; but one that is just slightly more altruistic. Instead of bailing out bankers — and now potentially hedge funds — why not use all this government subsidized profit to reduce the suffocating debt load that most average hard working people are being forced to carry for the rest of their lives. Chase did it for Canadians, so why not Americans? Is that really so hard to entertain at this point?
Withdrawals from hedge funds are skyrocketing according to a report from eVestment last year.
(WSP)”According to a report at eVestment, investors pulled $29.37 billion from hedge funds in the third quarter of this year, bringing the total year-to-date to an eyebrow-raising $76.86 billion. That’s more than twice the amount that was withdrawn in all of last year. Hedge funds are highly-leveraged, so $76.86 billion in withdrawals could translate into hundreds of billions of dollars of liquidations in stock and bond markets. The report further notes that this is the “sixth consecutive quarterly outflow.” Read more
Many people also suspect that these short term loans are being rolled over, which would suggest that they are not actually short term at all, further increasing the likelihood that they will be used for stock market speculation. This is obviously not what Fed loans are meant to be used for, as they are subsidized by the government — aka, the taxpayer.
This could also present ethical problems as well. The term “Hedge Fund” is just industry lingo for a small group of extremely wealthy investors, and by allowing these people to gain direct access to discounted credit without giving this privilege to the rest of the population, you begin treading into sensitive territory where you indirectly socialize the profits of the rich.
This is undoubtedly something that should be avoided, especially when you take into account the alarming and rapidly growing wealth gap in the United States; a problem that was even acknowledged by the great Ray Dalio himself. This is quite the testament considering he is one of the largest beneficiaries of cheap credit that there is.
Proponents of this plan might argue that it will increase liquidity and assist with capital formation, and that this could act to prevent another financial crisis, but one could easily argue that this is just an excuse.
Isn’t that what they always say: “it’s for our safety“.
Who’s safety — theirs or ours? As we all know, greed is a powerful thing, and absolute power corrupts absolutely.
Also, when you compare the fund activity in the 2nd and 3rd quarters of 2019, it shouldn’t take very long before you begin to realize how measurably these hedge fund portfolio’s had appreciated by the 2nd quarter. What’s very telling, though, is that this trend changes drastically in 3rd quarter, with many hedge funds reporting declining AUM values.
Could it be that the crowd was looking to exit the market, and if this was the case — and it definitely appears that way — should we really be surprised by this? With a 20% market correction in the 4th quarter of 2018 still fresh in everybody’s memories, and with many people likely posting very large gains for the year, the real question we should be asking ourselves is why wouldn’t anybody sell? Everybody knows — or aught to know — that we broke the record for the longest bull run in history in 2018, so it seems highly unlikely that people wouldn’t feel inclined to begin taking profits, especially when you consider the miraculous reversal seen in the indexes at the beginning of 2019.
All one has to do is look at Blackrock, who’s clients booked $350 billion in profits by the 2nd quarter of 2019, a massive increase, especially considering it was only six month ago that the financial news media had officially announced that we had entered into the first bear market in almost 10 years.
Just look at the feds balance sheet, which has somehow managed to balloon by as much as 10% in only one quarter — not year, quarter.
How is that even possible? Or better yet, where is the media?
Now they are considering giving this cheap credit to hedge funds too? When is enough, enough? This is America, not China or Russia, where the markets are micromanaged by a small group of well connected insiders who put their own self interest ahead of the interests of everybody else. If the argument is that the market could crash, then maybe it’s finally time to let the invisible hand run its course.
Most of this money doesn’t even seem to be trickling down into the general economy either, and this is evidenced by the disproportionate growth seen with companies like Apple, Microsoft and Tesla in 2019.
The banks already receive $100’s of billions in subsidies from their governments, so why make an already bad situation worse by extending this privilege to small groups of wealthy investors? It’s insanity to even consider such a thing.