Academic

The World's Largest Hedge Fund: No Experience Required

By Dan Filler

My colleague, Karl Okamoto, has an op-ed today in the Inquirer, pointing out that the Paulson bailout proposal would effectively create the world's largest hedge fund.  And he figures that Hank isn't going to manage the $700 million dollar fund himself: he'll want to hire someone.

Given that we are telling these managers that we want them to leave money on the table, under what circumstances do they agree to come to work? The answer will be a fixed fee. A fee of 2 percent of the assets under management is a typical solution. That's $14 billion a year to manage Secretary Paulson's new hedge fund.

But there's a rub:

Everyone understands that a buy-and-hold strategy can make money provided that you buy low and sell higher. Since the purpose of this new fund is to allow banks to unload inflated securities in order to avoid significant further write-downs, Secretary Paulson is looking to launch his new hedge fund by buying in at prices that are higher than the prevailing market price.

Hedge funds are usually designed to make money.  This money manager will be brought in to lose it!  As soon as the fund is approved by Congress, I'm going to submit my resume.  It's hard to dump $700 billion dollars, but for a few billion bucks...I'm willing to try.

Full post as published by The Faculty Lounge on September 24, 2008 (boomark / email).