Bush league: I'd rather bet on MY hedge fund

October 03, 1998|By Rob Kasper

Hedge funds and I go way back. When I was a kid I got paid

$1.25 every time I trimmed a neighbor's hedge. I squirreled the money away and tapped the hedge fund whenever I wanted to buy myself a small treat. Squirreling away money is a practice I have continued over the years, even though I often end up paying myself for yard work.

So when I saw the "Hedge funds send stocks plummeting" headline about John Meriwether's hedge fund losing billions and threatening the collapse of world credit markets, my first thought was, "Man, that guy must be up to his neck in shrubbery."

I had misunderstood. It turns out there are two kinds of hedge funds. One is the kind that I have, a backyard hedge fund. This is a fund where you stash the spare cash you earn by performing domestic chores, like trimming the hedge.

In my experience, such hedge funds can be used to purchase new garden tools, which could produce a headline such as "Hedge fund acquires new shovel" on the family's message board. Or it could buy shrubbery -- "Hedge fund acquires azalea." And in the worst-case scenario, this type of hedge fund could be used to relieve the empty-wallet syndrome -- "Hedge fund bails out tapped-out teen-ager."

The other kind of hedge fund is the Wall Street fund, the kind Meriwether operates at Long-Term Capital Management. This kind of hedge fund uses borrowed money. The funds are marketed to wealthy individuals and institutions, who aim to make money whether markets rise or fall by wagering that prices will move up or down.

Apparently, Meriwether and his hedge fund got into trouble when he bet on market "convergence" and then ran smack dab into a bad stretch of market "divergence."

Frankly, the details of exactly how the Wall Street hedge fund work elude me. But I get the gist of it. It is gambling.

People who claim to understand the inner workings of hedge funds tell me I am wrong in this characterization. Usually, these people are economists who talk about "economic models," "derivatives" and the "free flow of capital." They tell me that the financial traders making decisions on Wall Street are much more sophisticated types than the gamblers playing the ponies at the race track.

Usually, I lose these arguments because I don't understand economic theory, at least as it is outlined by economists, and because I am weak on the specific terms. I couldn't identify a "derivative," for instance, if it walked up and bit me.

But I do understand a little something about human behavior. And while reading the accounts of the near-collapse and subsequent bail-out of Meriwether's hedge fund, I took notice of the details of Meriwether's personal habits. He likes to gamble. He reportedly makes regular trips to Atlantic City and has held staff meetings at New Jersey's Meadowlands race track. In other words, he plays the ponies.

VTC Moreover, an acquaintance of Meriwether told the New York Times that the Chicago native would bet on Chicago Cubs games, but only after he had first received weather reports on how hard the wind was blowing at Wrigley Field.

All of this leaves me with mixed feelings about hedge funds. I remain an advocate of backyard hedge funds, of stashing a little cash away to pay for small domestic pleasures. A new wrench one fiscal year, a chain saw the next.

I don't have to worry about being asked to participate in Meriwether's Wall Street hedge fund. To qualify, you must have a net worth of at least $1 million, a standard I don't meet.

It is just as well. Despite Meriwether's reputation as a financial wizard and the fact that he had two Nobel laureates in economics helping him, no one apparently had taken the time to do a "worst-case scenario" of what would happen if all the bets went bad and he had the empty-wallet syndrome. To me, he sounds like a gambler who believes he can always beat the odds.

I like the fact that Meriwether is a Cubs fan, though. I confess that I am rooting for the Cubs to win the World Series, an outcome that seems unlikely. Right now, the Cubs have lost two games to the Atlanta Braves and are on the verge of being eliminated from post-season play.

So while I am rooting for the Cubs, I am not betting my hedge fund on them.

Pub Date: 10/03/98

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