Archive | March, 2015

Bill Ackman and the Hedge Fund Hogs

the MarketSo there’s this Guy, Bill Ackman. And he’s up to something, and the Feds want to know what.

The FBI’s got a proctoscope rammed so far up his tuchus they see daylight when he smiles. You wouldn’t expect a guy in Bill Ackman’s position (bent over a hitching post, his wrists and ankles bound together) to be smiling much, but Bill’s a salesman, so his smile’s just gotten a little meaner, is all.

Bill runs the Pershing Square Capital Management LP hedge fund. And there’s a suspicion scurrying around the FBI that PSC, in its need to hedge, has been indulging in “insider trading” as regards the price of Herbalife Corp. stock.

I’ve just completed my research into the matter, with my customary attention to detail. According to their website (www.herbalife.com), Herbalife is ” a global nutrition company that has
helped people pursue healthy, active lives since 1980…”, and their product line of “protein shakes and snacks, vitamins and dietary supplements, energy and fitness drinks, skin and hair care products” will promote your already healthy lifestyle. They make no claim of instilling health in a slackard, decadent life, or creativity in one without style.

My research revealed a distinctly negative bias in Mr Ackman’s regard for Herbalife’s financial future. At the same time, I came across no comments by Mr Ackman regarding his pursuit of “health” or his execution of “style” in his living. I tend, therefore, to believe that his focus is purely professional. It is his opinion that Herbalife is, economically, headed into the well-known tank. My research did not disclose his reasoning. It did, however, indicate in a small way a part of his procedure, which included selling Herbalife stock short, a little at a time.

I’m only distantly familiar with stock manipulation, and by that I mean any trading practices either esoteric or mundane. I’ve never had much to work with, and haven’t worked with it much when I did. My only connection to hedge trading came in 2008, when the removal of separation between commercial and investment banking led to The Mortgage Crisis, and that in turn shone a spotlight on hedging.

I’d never seen a financial panic before. With a complete failure of the banking system following The Crash in 1929, legislation, including the Glass-Steagle Act of 1933, effectively outlawed the kind of manipulations that caused such financial upheavals throughout my childhood and youth. The issue was effectively off the table until November, 1999. Halfway through Clinton’s second term, a Ronald Reagan-esque gesture wiped away that safeguard, and the American middle class was fed to the dogs. Even so, it took nine years to cave in on us.

A financial axiom dating back to the origins of banking in 15th Century Italy stated that profit and risk were joined together. The greater the profit you were going for, the greater the risk entailed. Actually the idea goes back much farther. Tribal hunters faced the same dilemma feeding their people. More or less. So until the Great Depression demonstrated the possibility of an economically-sourced extinction event, these fluctuations were regarded as inevitable natural occurrences. By financiers, that is.

Hedge trading came to prominence at that time, because it promised moderate financial growth at little or no risk. Why this idea didn’t strike the most conserative element of society, its bankers, as something akin to a perpetual motion machine still fascinates me.

My hobby is, I study con games. What makes them work, I wonder. Some of them have been around since the time of those first banks, 1465 or so, some since Roman times, some beyond. I guess.

The most potent aspect of The Hedge Fund is that, under certain conditions, it isn’t a scam. If no one in the market is running a hedge fund, the sole operating hedge fund will work perfectl. Similarly, if only a few, small hedge funds are running – preferably intermittently and on a “random” schedule – or if the market is entirely manual – no automated tradings by racks of computers, such as those used by institutions today – hedge funds can derive meaningful data from the traffic in the market – the market will function properly and the hedge funds will, too.

Problems show up when hundreds of hedge funds are operating 24/7. Accumulating data, making predictions based on that data and acting on those predictions serves to churn the data into a froth. Numbers building on numbers, which are no more than self-sustaining forecasts. Eventually, the structure collapses, or. to carry the metaphor over the top, it’s blown away by the jet stream, the trade winds.

As in all fables, particularly fiscal ones, there is a moral:

“You can certainly be too careful.”

And as far as Bill Ackman is concerned, he claims to have full documentation of his responsible acts regarding Habitrails – ah, that is, Herbalife. As I understand it, he made his first million as a character in the comic strip “Bloom County.” And he’s the one who blew the whistle back in 2008. That’s enough for me. I’ll stand by him until they bury him.

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