Tags: elias | blog | Fund | Managers

Fund Managers Flee

By    |   Friday, 03 August 2012 10:17 AM

The financial industry might be adjusting to today’s economic realities.

Three decades of undercapitalized debt formation, declining monetary velocity and low levels of investment relative to gross domestic product caused the financial crisis. But during this time, the percentage of income received by the top 1 percent of earners nearly tripled, debt relative to income grew fourfold and transactions per dollar fell 50 percent.

By 2008, the financial industry added less than 1 percent to GDP and received more than 25 percent of all corporate profits, according to the Federal Reserve. These profits were the result of undercapitalized financial products predicated on a fiat currency regime.

Over the past two years, prominent hedge fund managers have either closed or returned significant amounts of client money. In 2010, Stanley Druckenmiller closed his $12 billion hedge fund, Duquesne Capital, after nearly 30 years of stellar growth. Last year, Brevan Howard returned $2 billion of its $25 billion to investors, and Louis Bacon of Moore Capital returned $2 billion of its $15 billion to investors, despite averaging 18 percent per annum since 1989. Bacon claims this move was a reflection of more volatile markets in currencies, interest rates and commodities, as investors become more risk averse.

More efficient markets are predicated on greater capital reserve requirements. In fact, the commodities-market operator IntercontinentalExchange plans to increase the capital reserves for over-the-counter (OTC) swap contracts that involve energy products. This will be accomplished by placing them in the futures exchange, which is a more transparent and responsible system than the opaque OTC market. This is a step in the right direction given the total face value of outstanding derivative contracts is more than $600 trillion.

Capital reserves for fiat currencies are also recommended, since they would provide greater monetary stability—essential for long-term economic prosperity and purchase-power parity. Metals such as gold and silver would act as an economic proxy and stable-reserve system, similar to bank equity that ensures liquid withdrawals upon demand.

This trend toward greater equity in the financial markets bodes well for the future of our economy.

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Friday, 03 August 2012 10:17 AM
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