The Hedge Fund Con

Yglesias:

A couple weeks old, but a good one:

There is no doubt that hedge-fund managers have been good at making money for themselves. Many of America’s recently minted billionaires grew rich from hedge clippings. But as a new book by Simon Lack, who spent many years studying hedge funds at JPMorgan, points out, it is hard to think of any clients that have become rich by investing in hedge funds (whereas Warren Buffett has made millionaires of many of his original investors). Indeed, since 1998, the effective return to hedge-fund clients has only been 2.1% a year, half the return they could have achieved by investing in boring old Treasury bills.

Insofar as hedge fund managers are just running a scam where one class of rich people rips off another class of rich people, I'm not sure there's anything systematically problematic about this. But a large share of the money invested in hedge funds seems to come from foundation endowments and pension funds. That in turn makes me wonder to what extent some of the dysfunctional aspects of the financial system can be traced back to dysfunctional governance of those institutions.

He makes a couple of good points here.  One, hedge funds are a racket, with the manager getting a 2% annual fee plus 20% of all gains.  They are set up to fail, with large bets to increase price movement, and eventually the blow up.  But the manager gets rich.  Second, the giant pension funds are a big part of the dysfunctional financial system.  There is so much money in them, and they try to diversify so much, they've brought instability to all kinds of markets: mortgage-backed bonds, commodities, private equity.  No matter what the activity, pension funds are a player.  I don't know exactly what becomes of them, but they are an issue in the financial system.