Talk:Hedge fund/Archive 1

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Hurdles/HWM

Hurdles and Highwater marks definitely need to be spelled out here (by someone with a better financial literacy than I).

Also, side pockets.

The article could be improved by this -- hedgefunddot.

Recommend adding additional color on hurdles. For example, are highwater marks typically structured at a fund level or an investor level? In general, what portion of funds use a highwater mark vs. other hurdles? —Preceding unsigned comment added by 65.246.68.2 (talk) 16:32, 8 October 2010 (UTC)

Seward & Kissel

The mention of Seward & Kissell in the intro looks like a vanity edit. Anyone else have any views on this. As I explained when I removed it originally (it has been reinserted), I think the innovation was the investment strategy, and the law firm wasn't particularly important. (I say this as a lawyer.) Anyone have a different view? Westmorlandia (talk) 12:58, 17 March 2010 (UTC)

I was just thinking how odd it looks, too. Certainly it doesn't belong in the first para. But it's not correct, I don't think, to say the innovation would only have been in the investment strategy. Structuring new products can also be in the domain of smart lawyers. For instance, the creation of "registered hedge funds" that are registered under the 40 Act and the 33 Act (thus tremendously opening up distribution) was a lawyer-driven innovation.

If the claim is true (and that's the first I've heard about it), then it might belong in the article on SewKis: it is not important enough to be among the first things one reads about hedge funds. HedgeFundBob (talk) 01:07, 11 April 2010 (UTC)

It would not be entirely surprising if "Stnadel", who added the Seward & Kissel references, was Steve Nadel, partner in the Investment Management group at Seward & Kissel. If so, he's busted and should stop using this page to advertise his firm. ;-)

Seriously, I'll probably just report the spam next time, as I'm getting bored of deleting it. Westmorlandia (talk) 20:06, 3 May 2010 (UTC)

How odd. Everyone in the business knows Steve Nadel...would have thought he had other things to do. HedgeFundBob (talk) 01:02, 28 June 2010 (UTC)

Whoever it is, I just deleted it again.Lawblogger18 (talk) 04:40, 30 November 2010 (UTC)

It sneaked back, this time from 68.175.85.74. I'd expect more class from a lawfirm, probably its just a prank. More importantly, should that be "sneaked" or "snuck"? Servalo (talk) 10:17, 30 November 2010 (UTC)  ;-)

Found citation for US Regulation section

I am researching hedge funds and came across a reference that is needed here.

In the US Regulation section, the page states that non-accredited investors can participate in hedge funds, but a citation is needed.

I found this...does it work? http://www.hedgefundlawblog.com/non-accredited-investors-in-hedge-funds.html --98.108.136.252 (talk) 06:33, 18 July 2010 (UTC)

It is a blog, so it may be a low quality citation. Why not reference Rule 506 of Regulation D directly? Lawblogger18 (talk) 21:16, 24 December 2010 (UTC)

Poor internal rates of return

Has anyone else heard anything about Dichev and Yu's research, summarized an Absolute Return+Alpha article here? I'm not quite sure what to make of it. II | (t - c) 09:09, 12 December 2010 (UTC)

Its not anything new -- what is it that you find surprising? Lawblogger18 (talk) 21:17, 24 December 2010 (UTC)

History section nonsense sentence

In the history section, first sentence reads, "Sociologist, author, and financial journalist Al Harrington is credited with the creation of the thirty second hedge fund in 1249.[2]" This sentence is complete nonsense for a host of reasons, including the fact that Harrington is a basketball player, and that a "thirty second hedge fund in 1249" has no meaning. Does anyone know what was previously here? The next sentence begins with a reference to "Jones." 143.58.161.6 (talk) 18:15, 6 January 2011 (UTC)

don't know who made these revisions or why, but I undid those revisions. Lawblogger18 (talk) 22:39, 6 January 2011 (UTC)

Proposed expansion of History section

{{Request edit}} I have prepared for consideration a new draft of the current History section and posted it to my user page. I have a potential conflict of interest, since I work in the industry (see here) but that also has its upside: I've got quite a bit of research and knowledge to draw upon, and this article could use plenty of work.

Basically, the new section is an expansion on the existing version, only with more information and better cited sources. The current History section is rather short and does not explain how hedge funds found developed and became more widely used over time to their current form, so the proposed new version includes more detail on how Alfred Jones' fund became the first hedge fund and how the kind of fund he managed became known as a "hedge fund". I have also partly rewritten the explanation of how Jones' fund operated so that it is more clear to a layperson. The section then expands to cover the development of hedge funds from the 1960s to the 1990s. In particular, the proposed version now describes how hedge funds gained popularity in the late 1980s through to the 1990s and the difference in strategies used over time. All the new information has been carefully researched from reliable sources and I have also added citations to existing information that previously did not have a citation.

Feel free to offer your thoughts, or move it if you like. Thanks in advance. --Bryant Park Fifth (talk) 21:09, 16 March 2011 (UTC)

Done. It looks like a great rewrite. If you'd like any further help, contact me on my user talk page. You might instead want to put a {{help me}} template up on your own user talk, or put the {{edit semi-protected}} template back up on this page and either way someone will be along to help you. :) Banaticus (talk) 05:16, 17 March 2011 (UTC)

Thank you very much, Banaticus. In addition to having some thoughts about other sections needing work, I even have a bit of time, so I'll see what I can do in the next week or so. --Bryant Park Fifth (talk) 12:51, 17 March 2011 (UTC)

Banaticus - You indicate that the first fund of hedge funds was created in 1969 in Geneva. Out of curiosity, what was the name of the firm that launched the first fund of funds? Lawblogger18 (talk) 19:33, 19 March 2011 (UTC)

Hi Lawblogger18, I can answer your question. The name of the fund of funds was Leveraged Capital Holdings (present-day English-language website) and it was created by Georges Karlweis. The source is the Ineichen book listed in the references, Absolute Returns: the risks and opportunities of hedge fund investing. --Bryant Park Fifth (talk) 18:24, 21 March 2011 (UTC)

What is a Hedge Fund

I have witnessed more than one editor take a stab at the first sentence of this Article; and try to tackle the definition of what is a hedge fund, only to have such attempt reverted or revised. Maybe its time to fess up that there is multiple definitions to what a hedge fund is because it is a loose reference to a type of investment vehicle which is not defined by regulation or any other standardized definition. Lawblogger18 (talk) 08:44, 8 February 2011 (UTC)

Very true, and at various times the introduction has said something along these lines. The problems seem to be that an introduction emphasising that hedgefund aren't clearly defined seems to be hard to write well, and leaves quite a few editors unsatisfied... but by all means give it another try? Servalo (talk) 17:09, 6 April 2011 (UTC)

Strategies and Performance measurement

Further to my notes above, I have prepared new versions of two more sections (Strategies and Performance measurement) and moved forward with replacing the existing sections for each. The Strategies section was previously completely unsourced, and the list structure of the subsections was inappropriate for the level of detail. The first four subsections have been rewritten as prose, still addressing the concepts that had been listed under each heading. I have expanded the Performance measurement section to include up-to-date performance figures for the industry and rewritten the language on performance indicators for clarity. I am able to answer any questions you might have with regards to these two sections, and any further improvements would be more than welcome. Bryant Park Fifth (talk) 16:24, 18 April 2011 (UTC)

A short note here to say that I have made a few edits to the page today to bring information on the size of the hedge fund industry up-to-date. In the Industry size section, I have made changes to replace the 2008 industry size estimate with a more accurate figure, and to add more recent figures for the overall industry size and the largest hedge fund managers. In addition to these changes, I have added a sentence to the end of the Open-ended nature section, to note that hedge funds do typically have quarterly, semi-annual or annual liquidity. For any questions or comments regarding the above changes, reply here and I will be able to address them. Bryant Park Fifth (talk) 18:40, 25 April 2011 (UTC)

Hedge fund risk, Systemic risk

I have just posted, in my user space, new drafts two separate but topically related parts of this article. First: the top-level Hedge fund risk; second: the section associated with the second-level heading Systemic risk. I suggest these proposed versions (Hedge fund risk, Systemic risk) replace the current ones (Hedge fund risk, Systemic risk). I believe the longer portion, the full section, is evidently an improvement on what is there now. At present it is almost entirely unsourced, and to my reading has not enough content to work better as a list (I am looking to WP:EMBED for guidance). Instead I have organized it topically, addressing the most significant sub-topics as I see them. It is perhaps worth noting that I have made somewhat different use of a citation introduced last week by a once-off editor, subsequently repositioned by Servalo. I believe this version should be useful both to the absolute beginner as well as someone of greater familiarity with the subject. As to Systemic, the new is slightly longer than the current, addressing the same essential topics but with clearer language, more specific statements and updated to include recent writings. As I am interested in seeking consensus, I will ask for input from recently involved editors, but if there's not much activity one way or the other I will likely move these after the weekend. Suggestions most welcome. --Bryant Park Fifth (talk) 19:34, 8 April 2011 (UTC)

I have in fact moved forward with these new sections. Further improvements are welcome, and I am available to answer any questions about the new sections, if any. --Bryant Park Fifth (talk) 16:36, 11 April 2011 (UTC)

Look good to me. Servalo (talk) 10:52, 2 May 2011 (UTC)

Concerns about the Lead

As many probably know Wiki's policy on lead paragraphs WP:LEAD"The lead should be able to stand alone as a concise overview of the article. It should define the topic, establish context, explain why the subject is interesting or notable, and summarize the most important points—including any prominent controversies." The present lead does a good job of defining the topic but it goes into too much detail and does not give a summary of the entire article. I suggest we create a new section called Overview or Description and move most of the lead text into that section and then rewrite the lead so that it briefly defines and fully summarizes the entire article. I am willing to do this but wanted to see what others think. Comments?-- — Keithbob • Talk • 14:32, 29 June 2011 (UTC)

Suggesting a more complete, informative article introduction

I've already got a new section to propose, if this isn't too ambitious: the introductory section, which is not very good in its present form. I realize that this section has been debated before, but I'll make the case here for my version (located in my user space here: User:Bryant_Park_Fifth/Hedge_fund). First, the very first sentence is a poor description of what makes a hedge fund a hedge fund. The fact of the "hedged" portfolio and the reasons for doing so are most important to understand here, and the rest can be described subsequently.

Second paragraph takes the same focus as the one there now: a full summary of what makes hedge funds unique compared to other funds, and important general information about how they work and the shape of the industry. The performance fee detail from the original first sentence is now here, in more appropriate context. Overall, this is quite similar to the current second paragraph, but I think significantly more informative.

The third paragraph deals with regulations, which is similar to the current third paragraph. Once again, the version I have written is more complete and up to date. And some information in the current version that is not about regulation I have relocated to the second paragraph.

I recognize that this draft is about twice as long (from about 200 words to about 400 words) but given the complex subject and substantial length of this article, I think it's appropriate. Feel free to move it over if you agree, and offer suggestions if you have concerns about making this change. Note that if you do, I have commented out the previously prepared "History" section, so please simply ignore that. Lastly, all of my previously expressed cautions about editing directly still apply. --Bryant Park Fifth (talk) 19:10, 21 March 2011 (UTC)

The new intro is very well written, excellent work. I did make one trivial change, I linked "hedged" in the opening paragraph to hedge (finance). If you'd like any further help, contact me on my user talk page or put a {{help me}} template up on your own user talk page and someone will be along to help you. :) Banaticus (talk) 05:43, 26 March 2011 (UTC)

It's good. I'd suggest moving the to sentences near the end on the institutional ownership -- they are good factual material and should be in the article somewhere, but are too detailed for the introduction I think. I'm not sure where they fit best so I've left for now, but I have corrected a minor wording error on performance fees. Servalo (talk) 17:02, 6 April 2011 (UTC)

Regulation section

I've completed a draft for a new version of the section about the regulation of hedge funds, which is available in my user space here. I've kept the implied structure, although it is now written more fully and clearly and is properly referenced throughout (much of the current one is not). What's all-new is a sub-section covering the new Dodd-Frank regulations, which, surprisingly, are currently mentioned not at all. I also suggest simplifying the section name from "Regulatory issues" to "Regulation". As before, I'm inclined to seek consensus for the change before implementing it, and I'm open to additional suggestions. --Bryant Park Fifth (talk) 20:58, 1 April 2011 (UTC)

I've now asked for input at a few WikiProjects. Having received no response, I will be a little bolder and move my new draft over. In addition, a few days after gaining consensus for the new introduction, another editor came along and added a problematic second sentence to the very first paragraph. While I think there is some merit hidden in an otherwise inaccurate sentence, I'd rather move it into the section where it belongs for now, and then address it properly when I work on that section. Wikipedia is, after all, a work in progress and I want to work within the WP:BRD process. I'm open to discuss any details about this complex subject. --Bryant Park Fifth (talk) 14:22, 6 April 2011 (UTC)

Material looks ok to me. If you are inclined to go further, I think a lot of the section is quite technical and might be better as a separate page "Hedge fund regulation"? I've intended to take an axe to structure of the article for some time... Servalo (talk) 16:59, 6 April 2011 (UTC)

Thanks, I do agree that it is very long and technical. Certainly one challenge about this subject. I have modified your change to the entry; I see your point and have tweaked it again, in a manner that should make sense for all readers, whether well-versed or not. Meanwhile, I've been working out research for other sections of this page (which should be shorter) and I'll post them here for consideration when I am ready. Thanks for your input. --Bryant Park Fifth (talk) 19:24, 6 April 2011 (UTC)

I think the section is generally pretty good. In my view, though, the editors are not quite right in their statement that "[b]efore the Dodd-Frank Act made registration mandatory for hedge fund advisers with more than US$150 million in assets under management, hedge funds were primarily regulated through their managers or advisers, under the anti-fraud provisions of the Investment Advisers Act of 1940."

Hedge fund advisers with a principal place of business in the US must indeed register with the SEC if they manage $150m or more (with an effective date of July 21, 2011 but compliance required by March 30, 2012)--and the threshold is lower if they have other types of clients, like managed accounts or registered investment companies. Non-US advisers with private fund clients or investors in the US need not register with the SEC unless they manage the assets of those private funds from a place of business in the US. So, under US law, a "hedge fund adviser" could have a Delaware hedge fund with $1 trillion in AUM, but, as long as its assets are not managed from a place of business in the US, the adviser could obtain the Private Fund Adviser exemption.

Also, I don't quite understand the claim about hedge funds being primarily regulated "under the anti-fraud provisions of the Investment Advisers Act of 1940." Why anti-fraud as opposed to books and records? The activities of an SEC-registered adviser are subject to inspection via the books and records provisions of Rule 204-2. It is true that, if the adviser were unregistered, one might state that its hedge fund clients were regulated via Rule 206(4)-8. Is this what the editors are trying to say?

In a final wrinkle that makes all sorts of exceptions all over the article, there IS such a thing as a "registered hedge fund", whose shares are registered under the Securities Act, and the marketing and sales for which are not governed by Regulation D. I think these are esoteric enough that they perhaps do not warrant mention. Again, well done. — Preceding unsigned comment added by 220.241.199.217 (talk) 22:10, 28 June 2011 (UTC)

"In addition to U.S. hedge funds, many overseas funds with more than 15 U.S. clients and investors, and managing more than $25 million for these clients, will also have to register with the SEC by July 21, 2011."

This is wrong. Firstly, the language about "funds" is inaccurate. The rule-making is aimed at investment advisers, not funds; funds would not be required to register. Also, this should read "more than 14," and the compliance date is March 30, 2012.HedgeFundBob (talk) 12:01, 3 July 2011 (UTC)

Bias concerns and criticisms from a lay reader: FYI

I have been wanting to learn WHAT a hedge fund is for the longest time, as I am passionately interested in politics and economics. Coming from Google, I was not sure whether the Wiki article would be too scientific or too lay-person. I see in this discussion people are talking about the merit of the intro and definition. I suggest you come up with a simple, general version of what a hedge fund is / does (given that it is not an exact, or recognized definition), and then have a section at the top for different meaning(s) and clarifications.

I jumped straight to the controversy area and started reading because that's where I thought I would find the most valuable information. I find the sources and information cited here to be very one-sided and biased. For example there is a reference to how FSA, a major economic/financial adviser to the government, interviewed hedge fund managers, and asked them if hedge funds are dangerous. I'll repeat that back: hedge fund managers were asked by government experts if hedge funds are safe. The government "experts" then used the response of these hedge fund "experts" to say that hedge funds are safe. And then they say that "no one hedge fund individually poses systemic risk". Yes, but that is misleading, because it implies that the entire existence of hedge funds, in their numbers as previously specified in the article, are also safe. I'd also like to see a list of notable failed hedge funds, rather than just notable successful ones.

Perhaps there is just a struggle here in being scholarly - in other words, the sources and academia themselves are inherently biased. Well this must be true, hedge fund managers are educated, and they are educated by people who advocate for the principles that underlay hedge funds, thereby encouraging their existence in the system. So naturally those people who are educating are also writing the textbooks, or the articles, or both, etc, which are then referenced here as scholarly, reliable sources.

This article is pretty important and people will be coming here much more often as time goes by.

Azadismind (talk) 23:48, 22 June 2011 (UTC)

You outline several problems in three main paragraphs, I'll try to address them in that order.

Paragraph 1 deals with the definition. The article says "A hedge fund is a private investment fund that participates in a range of assets and a variety of investment strategies intended to protect the fund's investors from downturns in the market while maximizing returns on market upswings." This is quite broad (because the term is broad). It seems, to me, to be reasonably accurate. I'm not sure what parts of it you dislike. Please clarify. It's rather tough to say, "Most hedge funds..." about anything, as (again) the term is fairly broad and, as private funds marketed to large investors, there is limited material about them in broadly circulated sources. Consider the difference between, say, Index funds and Hedge funds to be similar to "the flu" and Glycogen storage disease type XI. Flu strikes millions of people each year. Millions of people invest in index funds. There are very few known cases of Glycogen storage disease type XI. Very few people invest in hedge funds. The mainstream press regularly discusses the flu and index funds. Not so Glycogen storage disease type XI and hedge funds. If a famous person were diagnosed with Glycogen storage disease type XI, the press would give some attention to it, similar to the way references to hedge funds' involvement in the larger economy have generated some press. If you find a reliable source that gives a definition/explanation, let us know.

Paragraph 2 discusses apparent bias. This goes back to the issue discussed above. We do not/cannot compare what reliable sources do not. For example, we list "notable" hedge fund firms, not "successful" or "unsuccessful". A notable fund is one with sufficient coverage in independent reliable sources to support us having an article. If the firm succeeds or fails, the firm remains notable, much like a film that tanks (such as Tiptoes with Kate Beckinsale, Matthew McConaughey, and Gary Oldman) is notable.

Paragraph 3 hints at what you feel the problem may be, but misses the fact that some of us in the "Ivory Tower" are really into throwing bricks at each other and everyone else. Certainly there are likely to be scholarly articles and, to a lesser extent (as discussed), popular press pointing fingers here. Let us know if you are aware of such coverage that we might be able to use. Thanks. - SummerPhD (talk) 18:06, 23 June 2011 (UTC)

Good response to the points outlined by Azadismind. Thanks for taking the time to reply to him. Cheers!-- — Keithbob • Talk • 18:39, 23 June 2011 (UTC)

As a minor point, it's worth pointing out that the notable hedge funds list includes Amaranth and Long Term Capital Management, both of which are famous only for failing rather spectacularly. Westmorlandia (talk) 16:00, 31 August 2011 (UTC)

Intro sentence

"A hedge fund is a private investment fund that participates in a range of assets and a variety of investment strategies intended to protect the fund's investors from downturns in the market while maximizing returns on market upswings."

What about long-only funds? The sentence appears to display a belief that a hedge fund must use hedging, which is not the case.HedgeFundBob (talk) 05:26, 7 July 2011 (UTC)

You are correct, the concept of hedge funds originated as a hedge against standard long positions in the stock and bond market but they evolved into a myriad of alternative investment strategies in many cases designed to outperform traditional long positions. Therefore the sentence you have cited needs to be corrected. -- — Keithbob • Talk • 00:58, 20 July 2011 (UTC)

I applaud the efforts, though I'm afraid think the intro is now less useful and less accurate than it was about 6 months(?) ago (before the originally offending sentence was written, I think). For example:

• "Aggressively managed"? As a generality, this is a myth. It is true of some hedge funds, but also true of some long-only funds. It isn't really a distinguishing feature of hedge funds.
• "international and domestic markets"? Not necessarily, and again not really a distinguishing feature of hedge funds.
• "often speculate on the more volatile assets such as foreign currencies and commodities"? Some do, some don't. I don't think it is right to say they "often" do.
• "aspire to accumulate capital gains by accurately predicting future price movements"? Some do, but this is true of other funds too. And many don't - e.g. arbitrage.

This version also seems to make hedge funds sound exciting and dangerous, which most people in the industry would probably disagree with. Broadly speaking, hedge funds are about controlling the risk, not taking a punt. The intro now also lacks any reference to the structural characteristics that help to determine what a "hedge fund" is - regulatory and fee issues, essentially. These need to go back.

On the other hand, the intro was certainly too long and needed changing. I will try to come up with something more appropriate but am a little short of time right at the moment. (Sorry to be somewhat less than constructive with this comment - I had meant to suggest something at this sitting!) Westmorlandia (talk) 15:54, 31 August 2011 (UTC)

Thanks Westmorlandia, good comments. The solution is to go by reliable sources per Wiki policy. Here is how the term, hedge fund, is defined:

• In finance, a highly speculative, largely unregulated investment device. Originating in the 1950s, the funds "hedge" by offsetting "short" positions (borrowing a security and then selling it at a higher price before repaying the lender) against "long" positions (borrowing money to speculate on undervalued stocks; see hedging; speculation), but not all so-called hedge funds are actively involved in hedging. In general, hedge funds, besides being unregulated, are investment capital funds that are limited to wealthy investors and large institutions, that are structured as partnerships, and that use investment strategies involving higher risks in an attempt to produce greater financial gains.--Columbia Encyclopedia
• an investing group usually in the form of a limited partnership that employs speculative techniques in the hope of obtaining large capital gains.--Webster's Dictionary
• a pool of capital which fund managers (for example, international banks) used to speculate on the foreign exchange, stock and commodity markets. Fund managers aim to make windfall profits by ‘correctly’ guessing future price movements. Their activities, which have become increasingly global and largely unsupervised by national regulatory frameworks, have, on occasion, served to destabilize the financial markets.--Collins Dictionary of Business-- — Keithbob • Talk • 14:26, 6 September 2011 (UTC)

Potential Sources?

• AR 2011 Hedge Fund Report Card (note: you can get a 2 week free trial and view the article)-- — Keithbob • Talk • 14:21, 6 September 2011 (UTC)
• Hedge funds, which started out catering mostly to high-net-worth individuals, family offices and smaller foundations and endowments, are increasingly keen to attract this newer investor base - and their larger investment tickets. For their part many pension funds and other institutions are beginning to look at hedge fund firms along the same lines as they consider traditional asset management firms, targeting those they perceive to be "institutional quality" organizations.

"When it comes to investing directly in hedge funds, institutions seem to take comfort in managers with the size and infrastructure to mitigate reputational risk and with some ability to make tactical asset-¬allocation decisions," says Girish Reddy, co-¬founder and managing partner of $6 billion, New York-based fund-of-hedge-funds firm Prisma Capital Partners. The importance of brand-name recognition is evident in the Hedge Fund 100, where the five largest firms - Bridgewater, J.P. Morgan Asset Management, Man Investments, Paulson & Co. and Brevan Howard Asset Management - managed a staggering $221.6 billion in combined assets when this year began. That's nearly as much as the $260 billion in total assets that all the firms in the Hedge Fund 100 managed a decade ago in our inaugural ranking. All told this year's 100 biggest firms managed a total of $1.21 trillion at the start of this year, up 12 percent from the $1.08 trillion in assets that the firms on the 2010 Hedge Fund 100 had. What remains to be seen as the hedge fund brand wars unfold is whether managers will be able to deliver the kind of consistent, noncorrelated investment returns that investors have come to expect. Size has not always been kind to hedge fund firms. Managers that have risen to the top of the Hedge Fund 100 (think Farallon ¬Capital -Management and ¬Goldman Sachs Asset ¬Management) have had a tendency to fall down again.----Euromoney Institutional Investor, “Hedge Fund100: Big Firms Strive to Earn Trust and Dollars of Insitutional Investors, Iogen Rose-Smith, May 2011 -- — Keithbob • Talk • 20:54, 7 September 2011 (UTC)

• ref name="CNN" [1]
• 100 Hedge funds to watch Financial Times, March 19, 2010
• ref name=2011HedgeFund100>"The 2011 Hedge Fund 100 Ranking". Institutional Investor, Inc. May 12, 2011.
• ref name="McKinsey&Company">The Asset Management Industry in 2010, 'McKinsey&Company, 2006. Accessed March 26, 2010.-- — Keithbob • Talk • 14:45, 28 October 2011 (UTC)

Restoring the introduction

Back in March, I worked with a couple of other editors on this page to write a new introduction section (that conversation here). The resulting version was much more complete and accurate. (Side note: as I disclosed at the time, I have a vested interest in the topic.) In the months since, the section has changed considerably, unfortunately introducing outdated and inaccurate information. Here are some problems with the current version:

• The first sentence makes reference to the United States and to the Securities and Exchange Commission, but the hedge fund industry is not exclusive to the U.S.

• The introduction now leads with what hedge funds aren't, which is confusing.

• The clause "(3)" minimal regulation is no longer true, particularly following the passage of Dodd-Frank in the U.S. and AIFMD in the EU. (In fact, the article has fairly detailed sections on these topics.)

• The clause "(4) some illiquidity..." is not something that is unique to hedge funds. Numerous types of investments are illiquid, so this just doesn't make sense as a defining attribute.

• And "(6) fees that reward hedge fund managers" is sometimes true, and sometimes not. The unique aspect is that hedge fund managers are only rewarded if they beat their performance year over year. Unfortunately, this is now missing.

One way or the other, all of the above needs to be fixed. I suggest returning to the version from April 27, which was had clear consensus and would be an improvement. On a related matter, the second two paragraphs of that version still exist, though they have been moved down to the "Description" section. I think it makes sense for those to be in the introduction. This is how they were intended, and hedge funds are a big enough topic that a single short paragraph is not quite enough. Can we find consensus make this change? Bryant Park Fifth (talk) 13:39, 31 October 2011 (UTC)

I agree with Bryant that the current lead has problems and he has outlined several of the issues above. However, the prior version also has some of the same issues ie it uses weasel wording and describes the subject in terms of what it is not. I would prefer at this point that we begin a new version in a sandbox and gain a new consensus since obviously there are editors active on the page that did not like the lead from April 27. -- — Keithbob • Talk • 17:00, 31 October 2011 (UTC)

Thank you for your feedback, Keithbob. I agree that the sandbox is a good idea, but it isn't necessary to start from scratch. The version that was live in late April was endorsed and improved by two independent editors, whom I have invited back to discuss this lead. So here is a sandbox with that draft: Talk:Hedge fund/Lead section.

If nothing else, it provides a basis to begin discussion. You mention that there were "weasel words" in a previous version of the article's lead, and if this is true then that does concern me. If you can offer specific examples based on the sandbox version, that will help facilitate discussion about how to find long-term agreement on how to begin this article. Thank you. --Bryant Park Fifth (talk) 20:13, 31 October 2011 (UTC)

Sorry folks, I've just redrafted the intro again without realising there was this discussion going on on the talk page. Please feel free to tear it up or go back to an earlier version. I just thought I would try and draft a lead that summarised all the points in the Description section. AWhiteC (talk) 23:09, 31 October 2011 (UTC)

Thanks AWhiteC, I appreciate your interest and involvement, although I'm afraid the current introduction is still inaccurate and also too short. I'll ennumerate them, first in the lead and then in the new material in "Description":

Lead

• It's not accurate to say "hedge fund" is the informal term for "any collective investment made on behalf of 'high net worth participants'"—better would be to say it's a euphemistic term for an actively managed private pool of capital.

• The terminology "'high net worth participants' (large organizations and/or wealthy individuals)" isn't quite precise either. Hedge funds are open only to qualified or accredited investors. This language is now in "Description" but it should be in the introduction. As WP:LEAD says, the introduction "should be able to stand alone as a concise overview" of the article. By moving "Description" back to the lead, this can be accomplished.

• Saying that a fund invests in "a wide range of financial instruments simultaneously" is wrong, too. Some funds are multi-strategy funds, but not all. And it's definitely not a defining feature.

• Regarding the statement that "there is no precise legal (statutory) or universally accepted definition of the term Hedge Fund", that is no longer the case either. In the U.S., Dodd-Frank and AIFMD in fact do this.

• Likewise, to say "there are some regulations governing investments of this type" is misleading. Following Dodd-Frank and AIFMD, they are fully-regulated.

• The final sentence, "Investors are typically able to redeem their investments on a quarterly, semi-annual or annual basis." is just a curious thing to include in the introduction.

Description

• The list, 1-5, is modified from a version of the lead that appeared last week, and was sourced entirely to an out-of-date textbook. Some of those issues have been addressed, but it's now basically duplicative of the paragraphs that follow, less accurate, and is not as well sourced.

As others have been bold, I'm going to be bold myself and change the top of the article back to what it was in late April. That version then had the support of Banaticus (who I invited to discuss here, and made some changes to the article yesterday) and another editor. If there are concerns about the version I am about to restore, I am more than willing to discuss them here. My goal here is to find agreement on a version of this introduction that is accurate and satisfies the requirements of WP:LEAD. Thank you. --Bryant Park Fifth (talk) 19:27, 1 November 2011 (UTC)

I think I may be being confused with Banaticus a bit; not to worry. I'm not going to edit the article because "too many cooks spoil the broth", but one or two brief points come to mind:

1. Maybe the header should mention the fact that hedge funds are relatively lightly regulated (typically registered in the Caymans).
2. Restricted access by investors is surely another key feature.
3. The second para seems long-winded and could easily be shortened.
4. There seems to be no mention in the article of the fact that top hedge fund managers are very well remunerated - more so than all other financial professionals - surely one of the key features of hedge funds.

AWhiteC (talk) 20:33, 1 November 2011 (UTC)

On further reflection, I've amended the introduction a bit further. I agree that the second paragraph was too lengthy, so it has been split. Likewise, I understand that there is interest in the very first paragraph being a more complete description of hedge funds. So I have moved some of this material up to the first paragraph. A few additional thoughts:

• As I mentioned above, it's no longer correct to say hedge funds are lightly regulated; following Dodd-Frank in the U.S. and AIFMD in the EU, hedge funds are fully regulated.
• By restricted access, I think you mean accredited and qualified investors. Who can invest is important, and I agree it should be more prominent within the introduction. This was in the third paragraph previously, now it is in the first paragraph.
• Investment managers of all sorts are very well remunerated, this certainly isn't just the case with hedge fund managers. And sometimes they are penalized: because of "high water mark" provisions, hedge fund managers do not receive performance fees unless they are net positive, counting losses from previous years. There is some about this in the "Fees" section although it could be more clearly written.

I think this version now is better still, although I'm open to further conversation. It's a very complicated topic, and worth getting right. Thank you. --Bryant Park Fifth (talk) 20:58, 2 November 2011 (UTC)

We're getting there. I've made some minor simplifying changes to the header. I am still seeing points that puzzle me though :-

1. Why "investment adviser" rather than "hedge fund manager" (or just "manager")?
2. I thought hedge funds were still significantly less regulated than other collective investments. In fact, I thought that hedge funds could only adopt their many innovative strategies because of light regulatory constraints.
3. Is there just one key identifying feature of hedge funds, and if so what is it?

AWhiteC, I believe I can answer your queries:

• I added the term "investment adviser" in order to be more precise, as this is the terminology used in the legislative language on which I based the amended first sentence of the introduction.
• On the issue of regulation, I think you may be confusing reporting/transparency with the different sets of rules that govern different market participants. For example, mutual funds are “regulated” by the 1940 Investment Company Act – through that legislation they must follow a certain set of rules: leverage is limited, use of derivatives and shorting is limited, the fund’s name must reflect what the fund buys. Hedge funds do not have to abide by these same rules governing their strategy, but they are now very much regulated by Dodd-Frank/AIFMD in terms of reporting, transparency, and systemic risk monitoring. Requirements now include registration and reporting to the SEC, systemic risk monitoring through FSOC, new regulations on derivatives, transparency of regulatory reporting to the public, marketing restrictions in the EU, etc. Due to this it is inaccurate to state that hedge funds are "lightly regulated" or that they are "significantly less regulated" than other market participants.
• There is actually not any one key identifying feature and this is precisely why it is so difficult to produce a definition that everyone is happy with. --Bryant Park Fifth (talk) 21:46, 4 November 2011 (UTC)

Interesting. I have a book on hedge funds on order. Perhaps I will understand the issues better once I've read that! AWhiteC (talk) 00:29, 5 November 2011 (UTC)

I think the intro is looking much better now - good work all. I have made some further changes to it to remove specifically US concepts such as accredited investors. I have also said "investment fund" rather than "pool of capital", as I think "pool of capital" will probably sounds odd to general readers (for whom the intro needs to be accessible). For the same reason, I have also gone back to the term "investment manager" rather than "investment adviser" - the managers do not just advise, so the term is slightly confusing, and "adviser" is only used in US legislation (which is obviously important, but definitive). I have also changed the first sentence because the fact that the fund is managed by a manager/adviser is not distinctive to hedge funds - the main point is (probably) the trade off between fewer regulations and limitations on who can invest in it/who it can be marketed to. I also removed a sentence from the third paragraph as it made the same point as the following sentence. I also moved the stat re institutional investors to the History section, as I didn't think it was needed in the intro. I also added reference to open-endedness and NAV calculation, as these are pretty fundamental to what the deal is with a hedge fund. I hope that all seems fairly sensible. Westmorlandia (talk) 15:35, 9 December 2011 (UTC)

Westmorlandia, I'd like to respond to a few of the changes you have made. For the most part I think there are fine, although there are some details I would like to see restored, and a few I would tweak further. For instance:

Worldwide, 61% of investment in hedge funds is from institutional sources as of February 2011.

I am not sure why this was removed. It's fairly noteworthy that a majority of investors are institutions, particularly as it's often assumed otherwise. Can we agree to reinstate this? If you think the sentence itself is too much, perhaps the same detail can be included in a parenthetical note in the previous sentence, where institutional investors are first mentioned.

Of the new material you have added, I would like to expand on one point in particular. You have added: "Hedge funds are open-ended, meaning that investors can invest and withdraw money at regular intervals." This is true, but also incomplete. While hedge funds do allow investors to withdraw money, those withdrawal periods are pre-negotiated and vary from fund to fund. Perhaps we can add this point to the end, and it becomes:

Hedge funds are open-ended, meaning that investors can invest and withdraw money at regular intervals, although withdrawal periods are pre-negotiated and vary from fund to fund.

Finally, a question. You write: "The value of an investment in a hedge fund is calculated as a share of the fund's net asset value, meaning that increases and decreases in the value of the fund's assets (and fund expenses) are directly reflected in the amount an investor can later withdraw." I'm not quite sure this is correct, and seems a bit simplified. But perhaps it could be dealt with later in the article more completely. Can you share your source for this information? --Bryant Park Fifth (talk) 19:53, 23 December 2011 (UTC)

Sorry for taking so long to get back, and thanks for the input. I removed the 61% reference simply because it seemed like a detail that wasn't needed in the introduction. I suppose I wouldn't really object to adding it with the other stats on hedge fund size, but we should try to be concise.

Regarding the open-endedness, I think this is a very important feature that distinguishes the funds from (say) PE funds, so it should go back. I don't think "pre-negotiated" is a good term, because it implies that individual investors negotiate their own redemption terms. This is very rarely the case. I am comfortable with the sentence being slightly incomplete - the concept is explained in fuller detail in the main body. I think we need to be concise in the intro.

Finally, the NAV statement is simplified (again, because it is the intro), but I think it is worth explaining in the intro that the value of someone's investment in a hedge fund rises (and falls) in proportion to the value of the investments held by the fund, as this is a fairly basic point in understanding an investment in a hedge fund. I am quite sure that it is correct, as I structure hedge funds for a living (on the legal side), but I'm afraid I don't have a source to cite. Westmorlandia (talk) 13:46, 19 January 2012 (UTC)

Hello again Westmorlandia, thank you for your response and apologies for my delay in replying to you. The wording of the sentences on open-endedness and the NAV statement based on your recent edits appear fine to me.

You noted that you would "not object" to re-adding the sentence on 61% of investment in hedge funds being from institutional sources; I believe this should be included in the introduction and wonder if you would mind adding it to the third paragraph, as you suggest?

Also, looking at the current introduction, I see that you have made an edit to amend the wording on management fees. Here, I wonder if a compromise between the new wording and the original could be made:

A hedge fund typically pays its investment manager a management fee, which is a percentage of the assets of the fund and designed to cover the operational costs of the manager.

Thank you. Bryant Park Fifth (talk) 16:24, 30 January 2012 (UTC)

Problems with Second Paragraph

I have issues with this paragraph in the current lead:

Hedge funds are distinct from mutual funds, individual retirement and investment accounts, and other types of traditional investment portfolios in a number of ways. As a class, hedge funds undertake a wider range of investment and trading activities than traditional long-only investment funds, and invest in a broader range of assets, including equities, bonds and commodities.

It is not encyclopedic to say what the subject is not. Or to describe it by saying how its different from something else. We just say what it is. Therefore the sentence about mutual funds should be removed IMO. Thoughts from others?-- — Keithbob • Talk • 16:28, 4 November 2011 (UTC)

I tend to agree. Why not just give the key distinguishing feature or features of hedge funds and leave it at that? AWhiteC (talk) 20:19, 4 November 2011 (UTC)

I have edited this paragraph so that it is more clear that the point here is not that hedge funds are not these things, but to use them as a point of reference to say what is distinctive about a hedge fund. --Bryant Park Fifth (talk) 21:12, 4 November 2011 (UTC)

Systemic risk

I'm sorry to have to say this, but the section on Systemic risk (under Debates and controversies) is propagandistic, and needs to be made more NPOV. My reasons for saying so are as follows.

1. It says "hedge funds are relatively small, in terms of the assets they manage". Well the assets under management were $1.93 trillion in 2008 (see second-last para of Hedge fund#History), whereas the debts of the Greek government in 2010 were €329 billion (according to Economy of Greece) – far smaller, but we all know how much trouble that has caused!
2. According to Philip Coggan (Guide to Hedge Funds, 2010, pp. 85-9), most hedge funds use leverage, which amplifies the risk, and the effect of herd behavior in a crisis could stress the banks, and probably did so during the 2008 crisis.
3. As the article says, a big US hedge fund called LTCM collapsed in 1998 as a consequence of a relatively mild international financial crisis. What it doesn't say is that it had to be bailed out by the banks etc to stop it wreaking havoc on the US financial system.

The hedge fund industry is a risk to the financial system, and it's not just me saying that. I therefore propose that the Systemic risk section be rewritten to be more neutral in tone. AWhiteC (talk) 22:25, 1 December 2011 (UTC)

Hello again, AWhiteC. I saw your note late in the week, and this weekend I have made an effort to answer some of your questions.

1. The $19.3 trillion figure describes the assets of the entire industry, not a single fund. The biggest hedge fund firm only manages about $59 billion, with a number of funds comprising that figure.
2. In the context of the financial services industry, hedge funds in fact are small. The top 5 mutual funds claim $4.1 trillion in assets and the top 5 banks can claim $8.4 trillion in assets. Both groups are multiples larger than the entire hedge fund industry.
3. As to the trouble the €329 billion debt of Greece has caused, and your suggestion that hedge funds represent a systemic risk, there are problems with the comparison: a) Greece is a single country, and you're comparing it to the assets of an entire industry -- wouldn't a more apt comparison be to one fund? And b) it isn't the size of the debt, necessarily, that has "caused" trouble, but rather the relation of that debt to the country's GDP. For Greece this is 144%, according to your source. U.S. debt is far greater than Greek debt ($14.9 trillion) but the U.S. debt to GDP ratio is somewhere around 99%. Again, I don't think this comparison is apt to the topic of systemic risk of hedge funds.
4. Regarding Coggan and leverage, it is true that many hedge funds utilize leverage, but it didn't likely exacerbate the 2008 crisis as suggested. I recommend the following 2010 paper, Hedge Fund Leverage (Ang, Gorovyy, Van Inwegen). The authors found that gross leverage for hedge funds was stable at 2.3-to-1 until mid-2007 where it steadily decreased from 2.6 in June 2007 to a minimum of 1.4 in March 2009. At the end of the sample, in October 2009, gross leverage was estimated across all funds to be 1.5-to-1. The authors also found that before and during the crisis, hedge fund leverage was counter-cyclical to the leverage of the rest of the finance sector. This means that as hedge funds were de-leveraging (borrowing less) banks and others were levering up (borrowing more).
5. Regarding LTCM, that firm was able to amass positions and leverage because of poor counterparty risk monitoring and the absence of any requirement by its counterparties that LTCM post margin to collateralize its trades. Since 1998 those practices have changed dramatically. Hedge funds are required to post initial and variation (as their position values change) margin for OTC and other trades, and prime brokerages and other lenders have developed sophisticated risk monitoring to protect themselves. In 2006, Chairman Bernake noted that as a result of these changes: "Many hedge funds have been liquidated, and investors have suffered losses, but creditors and counterparties have, for the most part, not taken losses." These changes would also explain the relatively low leverage of hedge funds now and through the crisis, as measured by Ang et al.

Given the data provided, and the absence of statements that "the hedge fund industry is a risk to the financial system" from authorities such as governments and regulators, I'm not so sure the current definition isn't neutral. As further support for this view, the Financial Stability Board (financial risk monitoring body of the G-20) released its list of Global Systemically Important Financial Institutions (G-SIFIs). As you can see for yourself, not one hedge fund was on the list. I hope this helps, and please let me know if I can explain anything more clearly. Best, Bryant Park Fifth (talk) 01:24, 5 December 2011 (UTC)

I'm afraid I don't entirely accept that, and I still feel after all you have said that the article does not give an entirely objective account of the systemic risk. I have therefore just edited that section to change the tone a bit; to give the view from both sides of the argument, not just one. The material is all soundly sourced. Please take a look and let's debate the issues here. You obviously have a lot of inside knowledge of these things. I note from your user page that you are declaring a conflict of interest. Bearing in mind the shaky state of the euro at present, we must all try hard to understand the risks should another financial storm blow up. AWhiteC (talk) 00:28, 15 December 2011 (UTC)

AWhiteC, this week I have finally had a chance to look closely at your changes to the "Systemic risk" section. I think that some of the edits do quite a bit to deepen the definition, however, there are a number of issues that I believe warrant further discussion.

• I see that you removed the following: "Compared with investment banks and mutual funds, hedge funds are relatively small, in terms of the assets they manage, and operate generally with low leverage, thereby limiting the potential impact on systemic risk." I am unsure as to why this was removed; this information was cited and the relative size of hedge funds provides important context to the issue of systemic risk. As I outlined in my previous reply, the hedge fund industry is relatively small in comparison with the broader financial services sector, particularly investment banks and mutual funds. Will you agree to its restoration?

• The new paragraph that you added, cited to Coggan, does provide valid points due to the source—he is a knowledgeable financial journalist—but it is important to note that these are largely conditional. (There are a lot of "could"s and "fear of" in this section of Coggan's book.) In that sense the explanation of "herd behavior" you provide misrepresents Coggan's view by changing from the conditional "systemic risk could be increased if there is herd behavior" to "systemic risk is increased in a crisis if there is "herd behavior". In fact, where there has been "herd" behavior—as in the latest crisis—there was no specific systemic shock directly linked to hedge funds failing.

• Also, in the same paragraph, leverage is mentioned twice as an "amplifier". While this is true, it can be, as I noted previously, current hedge fund leverage across the industry is only 1-to-2 at most. The new paragraph reads as though leverage is a fact of life for hedge funds that is always used and always present in the system at systematically-threatening levels. This is simply not the case, according to the data and the experience of the last crisis. I recommend again the Columbia Business School paper on this topic.

• I'm concerned there is now a misrepresentation of what happened with Lehman in 2008. In that situation it was hedge funds that were the victims of the brokerage bank mismanaging its risk and failing. Hedge funds did not cause this failure, and although a substantial amount of hedge funds' money was frozen by the bankruptcy, it did not cause a systemic shock. By mentioning Lehman in the context of a "domino effect" scenario, you imply that this actually happened in this case, but this is incorrect.

• A couple of citations have been lost in your edit to the paragraph on the FSA surveys—I'd suggest re-adding these at the end of the first sentence. Otherwise, this seems fine to me.

• Finally, not your edit, but I think that further clarification should be added following the mention of the European Central Bank charge. The source for this is from 2006 and since then many of the transparency reforms the ECB called for have begun to be implemented (through the AIFMD, SEC systemic risk reporting and Financial Stability Oversight Council). It is worth noting that although many smaller hedge funds did fail during the financial crisis, they did not cause the secondary systemic shock that the ECB warned of.

To give the most accurate representation of the potential systemic risk posed by hedge funds, I feel that the above-mentioned points do need to be addressed. I agree that this is a very important topic for people to understand properly, but this means we need to ensure that the information is correct and up to date, particularly with regards to the theoretical aspects of the section. I hope that my notes will be able to assist in this regard, and if you are generally in agreement I would like to try making some changes, and see what you think. Thanks, Bryant Park Fifth (talk) 19:55, 23 December 2011 (UTC)

Bryant Park Fifth, your position seems to be that hedge funds don't pose a systemic risk. The same might have been said of the banks before 2007. I note that your user page says that you have a potential conflict of interest in connection with the hedge fund industry: "I work with the Managed Funds Association", (the "advocacy, education, and communications organization" for "hedge fund and managed futures firms", as its site says). Could you be slightly more explicit about your relationship with the MFA?

Taking your points one by one:

1. My removal of "Compared with investment banks and mutual funds, hedge funds are relatively small, in terms of the assets they manage, and operate generally with low leverage, thereby limiting the potential impact on systemic risk." It doesn't matter whether the hedge fund industry is smaller or larger than others. The only question is whether it is big enough to cause a calamity like 2007/08. Surely it is. And any level of leverage gives rise to a risk that hedge funds could imperil the position of their lenders (after margins).
2. Regarding "systemic risk is increased in a crisis if there is "herd behavior"": OK, change "is" to "could be". Actually I think you are wrong, but on your head be it. Concerning what you say about the latest crisis, just because something didn't happen doesn't mean that there was no risk of it happening.
3. Leverage. Agreed, not all hedge funds use leverage. As I say above, any level of leverage poses risk of contagion, after taking account of margins. I believe the general level has been higher and might well be higher in the future. Gross leverage was about 2.5 overall in 2007, according to figure 5 of your Columbia Business School paper. It also says "gross leverage (including long and short positions) across all hedge funds is 2.1" (2010). Some funds have a much higher leverage ratio. Incidentally, how do you know "current hedge fund leverage across the industry is only 1-to-2 at most"? I gather that statistics are rather hard to come by for the hedge fund industry overall. (The statistics in the report are for 758 funds.)
4. Lehmans. The sentence in question is "The close interconnectedness of the hedge funds with their prime brokers, typically investment banks, can lead to domino effects in a crisis, and indeed failing counterparty banks can freeze hedge funds, as with Lehmans in 2008". What part of that are you challenging?
5. Citations in paragraph on the FSA surveys. I think there may be a slight misunderstanding here. The remaining citation refers to "Assessing the possible sources of systemic risk from hedge funds", Financial Services Authority (July 2011). This is the latest version of the report mentioned by (I think) the two citations you are refering to. Anyway, if you feel further citations are needed, please feel free to add them in.
6. Re ECB charges. It says "the European Central Bank have charged that hedge funds pose systemic risks", which is true. You say "transparency reforms the ECB called for have begun to be implemented" (my emphasis) – so surely we are not in a position to say that the problem has gone away altogether. It would surely therefore be premature to delete this text. It is true that there has as yet been no systemic shock attributable to hedge funds, but it is future crises that I am sure we are all worried about – every financial crisis is different.

The text as it stands makes points for and against risk, and I personally think it is fair, objective and does not exaggerate the risks unduly. This might be a very important matter if the hedge fund industry showed instability in the future, perhaps in the context of the present euro crisis coming to a head. AWhiteC (talk) 23:36, 23 December 2011 (UTC)

Thank you for your detailed reply, AWhiteC. Before I respond fully, I'd like to address the question you had about my connection to MFA. I have mentioned my work with MFA in order to comply with the COI guideline, and I have been clear about this since I first started making suggestions on this page earlier in the year. I promise I will always keep my comments based on sources and guidelines, and if you don't mind, I would like to keep the focus on the specific topics.

Back to the subject at hand: I appreciate some of the points that you raise above, however I do think that some adjustments to the section are still necessary for complete accuracy and to provide full context to the issue.

• Regarding the removal of: Compared with investment banks and mutual funds, hedge funds are relatively small, in terms of the assets they manage, and operate generally with low leverage, thereby limiting the potential impact on systemic risk. This sentence does not say that hedge funds pose no potential for systemic risk, but that their size and relative lack of leverage limits the potential for systemic risk. If we’re looking to balance the definition I would argue that this data is necessary. You say "It doesn't matter whether the hedge fund industry is smaller or larger than others. The only question is whether it is big enough to cause a calamity like 2007/08." I don't think that we disagree that the size of the industry is a key factor in its potential to cause systemic instability. What I would stress it that it is necessary to compare the hedge fund industry to other financial sector participants in order to provide context and better understanding of how big the hedge fund industry is within the broader financial sector. And you say: "Surely it is." And that may be your opinion, but that is not a fact supported by data. If you have such data, let's discuss it. It is relevant that their potential for systemic risk is lower than banks and mutual funds, and I hope we can agree to reinstate it.

• On the subject of leverage, I understand your concern, however there are multiple sources regarding leverage not being at threatening levels and not having any role in systemic instability in the recent financial crisis. I've provided data to support my point here, but I am unsure what you are basing your argument upon that "any leverage poses risk of contagion". You asked where I had found the statistic on current hedge fund leverage, I actually just carried out a Google search, where I found a figure from a report released in May.

• With regards to the mention of Lehman in the following sentence, you say: "The close interconnectedness of the hedge funds with their prime brokers, typically investment banks, can lead to domino effects in a crisis, and indeed failing counterparty banks can freeze hedge funds, as with Lehmans in 2008." I'm sorry if I was not clear before, but my point is that mentioning Lehman at all here is misleading. By including the Lehman example you imply that this was a scenario where there was a domino effect caused by hedge funds not having access to those funds, which then led to greater systemic impact from the bank's failure—this systemic shock did not occur, therefore it is incorrect to say "as with Lehmans", and Lehman Brothers should not be mentioned in this section.

I hope that these notes clarify my thoughts on the section and I would, in particular, ask you to reconsider the inclusion of information on the size of the hedge fund industry, since this does provide important context to the discussion of systemic risk. Thanks, Bryant Park Fifth (talk) 22:46, 27 December 2011 (UTC)

Bryant Park Fifth, you seem to be reluctant to state the nature of your connection to the MFA, which I understand is the main advocacy outfit for hedge funds. Can I just ask a simple question, because it is important: are you remunerated in any way to edit Wikipedia in connection with the hedge fund industry?

I have been thinking about our points of disagreement, and I think I have found ways to work towards resolving them, as follows.

1. You want this sentence to be reinstated: "Compared with investment banks and mutual funds, hedge funds are relatively small, in terms of the assets they manage, and operate generally with low leverage, thereby limiting the potential impact on systemic risk." I suggest we rewrite this a bit before reinstating it. As it stands, it is shot through with problems, for example: (1) individual hedge funds may be "small" but some hedge fund sectors are large and the industry overall is very large ($2 trillion), (2) according to The Daily Crux, Pure Alpha II, currently the biggest hedge fund, has $122bn assets (and uses leverage), (3) LTCM had $5bn in assets before it crashed in 1998 imperiling the US financial system and necessitating a bailout by US financial institutions, (4) mutual funds have less leverage than hedge funds, in fact generally none at all. I would suggest the following rewording of that sentence before it is reinstated: "Compared with investment banks, most hedge funds are small in terms of the assets they manage, thereby limiting the systemic risk they pose, although some are big enough to destabilize the financial system as LTCM did in 1998, and the industry overall is quite large and employs leverage albeit generally less than investment banks. The hedge fund industry is smaller than the mutual funds industry, but the latter generally has no leverage and thus avoids contagion to other parts of the financial system." This feels unwieldy. I can't reduce it without losing information. Any suggestions welcomed.
2. You seem to be implying that there is a safe level of leverage to avoid systemic risk, but I have been unable to find any reference on the Internet or elsewhere to what that safe level might be and whether the hedge fund industry's current levels of leverage are safe or not. Surely, it is a matter of degree: the more the leverage the more the risk. I looked up your report released in May. You seem to have forgotten to mention the following text therein: "Falling leverage suggests the $2 trillion hedge-fund industry is taking on less risk. However, another report Tuesday suggests the opposite." (my emphasis). Anyway, my point about "any leverage poses risk of contagion" hardly requires any "data" to confirm it: if you borrow money and can't repay it, you embarrass the lender financially. This surely holds true for any level of leverage. Margins reduce but do not eradicate the problem. Everyone assents to the proposition that leverage increases both profit and risk. I feel happy that the paragraph you are focusing on (the third under "Systemic risk") is balanced, fair, objective and well-sourced. If you would like to propose changes, let's discuss them here.
3. I don't agree with what you are saying about Lehmans here, but I'm beginning to lose the will to live, so why don't we omit it, as you suggest. So, the sentence should become: "The close interconnectedness of the hedge funds with their prime brokers, typically investment banks, can lead to domino effects in a crisis, and indeed failing counterparty banks can freeze hedge funds.". (I have simply dropped "as with Lehmans in 2008" from the end.) AWhiteC (talk) 11:36, 29 December 2011 (UTC)

Thank you for your note, AWhiteC, I will have a proper reply for you later this week. Thanks, Bryant Park Fifth (talk) 17:23, 9 January 2012 (UTC)

Apologies for the delay in this response, AWhiteC. Similarly to you, I feel that we can find some compromise to resolve our points of disagreement. I hope that the below will assist:

• I agree that we should try to find an alternative wording that provides a compromise with regards to the statement on comparative size of the hedge fund industry. Perhaps this would work?

Compared with investment banks, most hedge funds are relatively small in terms of the assets they manage and generally employ leverage to a lesser extent, thereby limiting the systemic risk they pose. Some funds have been considered large enough to potentially cause destabilization of the financial system, should they fail, for example those holding over $1.5 billion in assets are included in the institutions subject to systemic risk reporting to the SEC.

(Source for the SEC data is Reuters)

• To move forward the discussion of leverage and seek a compromise here as well, I would like to put forward three changes to the third paragraph for your consideration:

1. Change "Systemic risk is increased in a crisis if there is 'herd' behavior" to "Systemic risk may be increased in a crisis if there is 'herd' behavior".
2. Change "The extensive use of leverage (loans to amplify gains) can lead to forced liquidations in a crisis."—which implies that there necessarily is such use—to "If there is extensive use of leverage (loans to amplify gains) this can lead to forced liquidations in a crisis."
3. Make the following addition:

"In May 2011, an industry report stated that average leverage employed by hedge funds had decreased to 1.10 times investment capital and the proportion of firms that "do not usually use leverage" had increased to approximately one-third of the industry."

• Your suggestion for removing Lehman mention from the sentence on domino effects sounds fine to me.

With regards to your question about my work with MFA, I'm not sure what you're asking. I work in a communications role, I do outreach and that's my goal here. To find consensus with others and help encourage this page to be more accurate. Thanks, Bryant Park Fifth (talk) 22:18, 20 January 2012 (UTC)

Bryant Park Fifth, I entirely accept what you are saying about your role in connection with MFA. Thanks for clarifying that. However, finally, just so that I can get my head round this, can I just ask whether you are on their payroll or work for them on a contract basis?

I am thinking about your proposed changes and will get back to you, maybe in a day or two's time, when I've had a chance to find some spare time. AWhiteC (talk) 10:48, 23 January 2012 (UTC)

Bryant Park Fifth, I have finally got round to thinking about these issues:

• Comparative size of the hedge fund industry. I feel that we aren't converging on a compromise wording here. I would suggest that either we omit this sentence or have a much snappier one such as: "It is sometimes alleged that no hedge fund is too big to fail, but in fact LTCM failed in 1998, necessitating an industry bailout to contain systemic risk. It had only about $5bn of assets whereas some of the largest hedge funds of today have assets of upwards of $100bn. The hedge fund industry manages assets exceeding $2 trillion – less than say the mutual fund industry, but still potentially destabilising bearing in mind leverage and other risk factors."

• You can say "there is a risk that it will rain" or you can say "it may rain", but surely not "there is a risk that it may rain". Are you serious that herd behaviour may not necessarily increase systemic risk? On the second point, by "extensive use of leverage" I meant that leverage is used extensively by the hedge fund industry, albeit that not all types of fund use it. Concerning your proposed addition of a sentence on reduced leverage, I personally don't think it helps make the situation as regards systemic risk clearer, since (1) reducing leverage only reduces risk, doesn't eliminate it; (2) if leverage can decrease it can increase (and probably will) in future.

I would suggest leaving the systemic risk section unchanged for now until we can resolve these issues. Incidentally, my spelling should perhaps be changed from British English to American English, if that is the predominant style of the article.

It would be helpful to have an answer to the question as to your mode of remuneration by the Managed Funds Association. AWhiteC (talk) 23:41, 26 January 2012 (UTC)

AWhiteC, thank you, I will respond when I have had some time to consider your response properly. Regarding my work for MFA, I feel that I have been as open as I can be. With all due respect, I believe that further details are a private matter.

As we're discussing these issues I realize we had come to agreement on some of the above, including removing Lehman from the section discussed. Would you be willing to make this edit? Thanks, Bryant Park Fifth (talk) 16:22, 30 January 2012 (UTC)

AWhiteC, I'd like to thank you for your edit removing mention of Lehman. I have had some time to consider your last reply and upon further reflection of our recent discussions, it seems we are in need of a neutral third opinion. In particular, I feel that we need a third opinion on the material regarding comparative size of the hedge fund industry, the phrasing around herd behavior, and details on use of leverage. I hope that you do not mind, I have created an entry at WP:3O to request that another editor review our discussions and offer their thoughts on how to proceed. Thanks, Bryant Park Fifth (talk) 21:57, 8 February 2012 (UTC)

Hey, guys, I'm here from the 3O board. It looks like this is a pretty complex issue, so forgive me if I take some time to look into it in more depth. If I don't respond in 24 hours, please feel free to post a message to my talk page, asking me what's going on, or just relist it on the 3O board for someone else to take; whichever is your preference. stricken, see response below

In the meantime, let me just say that I think Bryant's disclosure of his COI is quite reasonable and forthright. Really, all we need to know is that he has one, so we can submit his views to the greater scrutiny they deserve. At first glance, I don't see any problem with his edits, so unless you have a complaint about a specific edit (or edits), we don't really need to go into any more detail, so let's not press him for any more information on it. Such demands could could be interpreted as veiled accusations, but I for one am perfectly willing to assume good faith on them if they don't continue. Finally, I'd just like to commend you on one of the more civil disputes I've seen listed at the 3O board. Thanks! Writ Keeper ⚇♔ 23:03, 8 February 2012 (UTC)

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Okay, after looking at the dispute, I tend to agree that AWhiteC's wording would be preferable, but I think you, Bryant, are disagreeing because of a misunderstanding of the text. For the "herd behavior" issue, read it closer: you've quoted it "Systemic risk is increased in a crisis if there is 'herd' behavior," but the text in the article says, "Systemic risk is increased if in a crisis there is "herd" behaviour." I think that "if" in there brings it more into line with what you were thinking. The "leverage" language is similar; it "can lead" to liquidations and illiquidity "can be" an amplifier; the article does not say that either of them definitively cause these effects, only that they can. Really, the language in the entire section seems to me to be quite guarded and cautious (which is exactly how it should be in the dismal science); I don't think there's a need to make it any more so. Finally, for your point about the size of the hedge funds, I actually can't find any particular mention of it in the subsection we're talking about; is it in a different subsection?

Having said all that, let me just add a few notes as a normal editor: it seems to me that the subsection could use a little copyediting love. There's nothing obviously wrong with it, but I think a lot of problems that Bryant is having stems from the layout of sentences and use of punctuation; if they were solved, we might not even be having this discussion. Once I hear back from one of you, I'll start trying my hand at improving it, starting with commas around the dependent clause in the "herd mentality" sentence. Writ Keeper ⚇♔ 01:40, 9 February 2012 (UTC)

Writ keeper, thank you for coming in here so quickly and taking the time to look through these rather lengthy discussions. I do appreciate your thoughts on the wording around herd behavior and leverage, you may be right that some copy editing would help to clarify things here. I for one would be most happy for you to make some edits, as you see fit.

With regards to the size of the hedge fund industry, previously the following was included in the section:

Compared with investment banks and mutual funds, hedge funds are relatively small, in terms of the assets they manage, and operate generally with low leverage, thereby limiting the potential impact on systemic risk.

This was sourced to the Sebastian Mallaby book and NYT Dealbook piece that are still cited in the section.

The sentence was removed by AWhiteC, who has argued that the relative size of the hedge fund industry does not matter, only whether it could potentially cause systemic risk. My position is that the sentence should be replaced since the comparative size of the hedge fund industry provides important context to the issue of systemic risk. I have noted in the discussions above: the hedge fund industry is relatively small in comparison with the broader financial services sector, particularly investment banks and mutual funds. Without this information, the discussion of systemic risk in the article may give the impression that hedge funds/the hedge fund industry potentially pose greater risk than any other area of the financial sector.

I had also suggested an alternative wording:

Compared with investment banks, most hedge funds are relatively small in terms of the assets they manage and generally employ leverage to a lesser extent, thereby limiting the systemic risk they pose. Some funds have been considered large enough to potentially cause destabilization of the financial system, should they fail, for example those holding over $1.5 billion in assets are included in the institutions subject to systemic risk reporting to the SEC.

(The source for the SEC data is Reuters)

Your thoughts on this matter would be welcome. Thanks, Bryant Park Fifth (talk) 15:32, 9 February 2012 (UTC)

I've just finished a little copyediting of the article; I'm afraid it won't make as much difference as I thought, but let's see how it goes. As to the hedge fund size thing, I don't have a big problem with your wording, but I think we should make it clear that we're talking about individual hedge funds. I suggest this:

Although the hedge fund industry is large, hedge funds themselves are individually relatively small in terms of the assets they manage, and operate generally with low leverage, thereby limiting the potential harm to the economic system should one of them fail.((source))

(Of course, this wording depends on having a source that we can explicitly cite for the entire contents of the sentence.) We would insert this where it was previously, right before the "small enough to fail" thing. I definitely think there should be *some* sort of introductory sentence there that explains the "small enough to fail" thing explicitly, which is what my formulation above is striving to do. Let me know what you think. Writ Keeper ⚇♔ 14:41, 10 February 2012 (UTC)

Writ Keeper, continued thanks for your input here and work copy-editing the article. Mostly that looks fine, although I am concerned about the opening of the sentence you suggest, since it begs the question "large compared to what?" As you've pointed out, the removal of the sentence has left the current mention of Mallaby's "small enough to fail" statement without any context. Perhaps a good solution is to expand that sentence with the details from your proposed addition, like so:

Financial writer Sebastian Mallaby has described hedge funds as "small enough to fail", since hedge funds themselves are individually relatively small in terms of the assets they manage, and operate generally with low leverage, thereby limiting the potential harm to the economic system should one of them fail.

The existing citations (Mallaby and the NYT piece) would support this addition. What do you think? Thanks, Bryant Park Fifth (talk) 00:05, 11 February 2012 (UTC)

That sounds pretty good to me. I wonder if AWhiteC is actually watchlisting this page? Let me drop him a line on his talk page and see if we can't get some more input. Barring an objection from him, I think that'd be a good compromise. Writ Keeper ⚇♔ 04:55, 11 February 2012 (UTC)

I'm back! I have been doing other things; apologies. Let me address the recently proposed wording (immedietely above, partly in bold font). I think we are near a resolution on that point. My residual worries are as follows.

• I feel uneasy about saying "small" when the biggest hedge funds have assets of over $100 billion. Do we have citation for that being small enough for adequate system stability? (I do not have Mallaby to hand, but could get a copy at short notice.)

• "Low leverage" needs also to be backed up by a citation, since it is rather a matter of opinion what level of leverage is critical. What does Mallaby say? Also, are we in danger of confusing net industry leverage with leverage of different sectors of the industry and individual hedge funds?

AWhiteC (talk) 21:42, 13 February 2012 (UTC)

That's a good point; I meant to bring that up but forgot. :P These are statements that need to be directly supported; Bryant, can you by any chance provide quotes or page numbers for direct support of these? If you can, then we should add inline citations for them. As for "small," I would've liked to put the qualifier "usually" or "on average" if we didn't have so many adverbs modifying "small" already. Would "...since 'in general,' hedge funds themselves..." be better?

(By the way, no worries on taking a while to get back to us; one of my favorite rules on Wikipedia is there is no deadline.) Writ Keeper ⚇♔ 21:52, 13 February 2012 (UTC)

Hello AWhiteC and Writ Keeper, I have gone back to the Mallaby book and he covers the points from the above language in his introduction. On page 12, he writes:

At some point in the future, a supersized hedge fund may prove too big to fail, which is why the largest and most leveraged should be subject to regulation. But the great majority of hedge funds are too small to threaten the broader financial system. They are safe to fail, even if they are not fail-safe.

On the same page, he writes:

Perhaps it is no surprise that the typical hedge fund is far more cautious in its use of leverage than the typical bank. The average hedge fund borrows only one or two times its investors' capital, and even those that are considered highly leveraged generally borrow less than ten times. Meanwhile investment bans such as Goldman Sachs or Lehman Brothers were leverages thirty to one before the crisis, and commercial banks like Citi were even higher by some measures.

The "small enough to fail" quote comes from his conclusion, where he states on page 376:

Whereas large parts of the financial system have proved too big to fail, hedge funds are generally small enough to fail. When they blow up, they cost taxpayers nothing. [author's italics]

To respond to AWhiteC's point about funds over $100 billion, on re-reading the book's conclusion I noticed that Mallaby states the following on page 390:

At $200 billion, a hedge fund would still be considerably smaller than a small investment bank such as Bear Stearns, which held assets of $350 billion as of 2006. ...

As of January 2009, Institutional Investor magazine listed only thirty-nine hedge funds worldwide with capital over $10 billion.

He goes on to note there are "nine thousand or so" other funds which are considerably smaller.

These two quotes underline the point that I think should be included here, that the majority of hedge funds are small in comparison to other institutions in the financial sector. Perhaps a further tweak to the suggested addition would help here:

Financial writer Sebastian Mallaby has described hedge funds as "small enough to fail", since most hedge funds themselves are individually relatively small in terms of the assets they manage, and operate generally with low leverage, thereby limiting the potential harm to the economic system should one of them fail.

Thanks, Bryant Park Fifth (talk) 14:29, 14 February 2012 (UTC)

Great! With those quotes, and that modification I'm quite satisfied. Thoughts, AWhiteC? Writ Keeper ⚇♔ 14:48, 14 February 2012 (UTC)

OK, let's get this sorted out. I propose the following version of the wording above.

Financial writer Sebastian Mallaby has said most hedge funds are "small enough to fail", since most are relatively small in terms of the assets they manage, and most operate generally with low leverage, thereby limiting the potential harm to the economic system should one of them fail.

Mallaby (see above) says that most but not all hedge funds are "too small to fail". I started by trying to make that minimal change to the words, but found that good English demanded further reordering.

It has to be said that the wording in the article on systemic risk is pretty mild. Risk factors include: (1) the hedge fund industry is huge ($2 trillion); (2) the biggest funds have assets of $100 billion plus; (3) LTCM had assets of only $5bn when it collapsed and nearly brought the entire US financial system down; it had to be bailed out by the Fed and other institutions; margin rules have tightened since then, but the risk remains; (4) many hedge fund strategies involve trading volatile investments; (5) they use leverage to multiply gains, which also multiplies risk; (6) some of them invest in illiquid assets that might have to be sold at heavy losses in a crisis; (7) herding behaviour within hedge fund sectors can occur; (8) many of their strategies are based on studying market data for the boom years before the credit crunch, and are malfunctioning in these more troubles times.

I think we all understand what is at stake. If the authorities were to perceive that hedge funds posed a systemic risk, they would impose regulation on the industry, which would necessarily reduce profits. Hence the lavish expenditures on advocacy by the industry, including even paying people to edit Wikipedia. But the likely consequences of systemic failure are so drastic that we would all be well advised to err on the side of caution when it comes to assessing hedge fund industry risk. I would therefore recommend the text above as (hopefully) the last word on the matter. AWhiteC (talk) 11:40, 15 February 2012 (UTC)

AWhiteC, with regards to your point that a perception of systemic risk would lead to regulation of hedge funds, this has in fact already occurred: the Dodd-Frank Act in the U.S. and AIFMD in Europe—both passed in 2010—have introduced measures for greater monitoring and control of hedge fund activities (this is discussed at length in the article).

That said, it doesn't seem we are too far apart on the wording. I'd like to suggest an adjustment that I believe reads a little more smoothly, with less repetition, if I may:

Financial writer Sebastian Mallaby has said hedge funds are generally "small enough to fail", since most are relatively small in terms of the assets they manage and generally operate with low leverage, thereby limiting the potential harm to the economic system should one of them fail.

The second "most" is implied by the first instance so I have removed the comma to make this clear. In addition, I would suggest using "generally" instead of "most" in the first instance and "generally operate" rather than "operate generally". Does this work just as well? Thanks, Bryant Park Fifth (talk) 14:41, 15 February 2012 (UTC)

Bryant, Quick response: I still prefer my own wording. I will think about it and get back to you. Writ Keeper may want to comment. AWhiteC (talk) 19:25, 15 February 2012 (UTC)

I tend to be a fan of trying not to repeat words within a sentence; so I'm probably more in favor of Bryant's, for subjective, purely stylistic reasons. How about:

"Financial writer Sebastian Mallaby has said that hedge funds tend to be "small enough to fail", since most are relatively small in terms of the assets they manage, and they usually operate with low leverage, thereby limiting the potential harm to the economic system should one of them fail."

But really, any of the three should be fine; they're all good enough as far as style is concerned, and they all mean more or less the same thing. Basically, my optimal sentence would have a different synonym of "usually" (e.g. generally, most, tend to be, etc. etc.) in each of the three locations where AWhiteC has the word "most." Beyond that, I think we're good. Writ Keeper ⚇♔ 21:27, 15 February 2012 (UTC)

Writ Keeper, your wording looks fine to me. Thanks, Bryant Park Fifth (talk) 21:59, 15 February 2012 (UTC)

Writ Keeper, I am happy with your wording. I would just go ahead and make the change. AWhiteC (talk) 19:33, 16 February 2012 (UTC)

Okay, I just updated the article. I think that was the last thing we needed to discuss here, so I guess we're done! Send me a message on my talk page if you think I can help with anything else. Thanks, both of you! :) Writ Keeper ⚇♔ 19:42, 16 February 2012 (UTC)

Thank you, Writ Keeper, I very much appreciate your input here. Thanks, Bryant Park Fifth (talk) 00:24, 17 February 2012 (UTC)