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Money-shuffling capitalists

Did you see? Another hedge fund wants to float itself as a listed equity...

DID YOU SEE? Another US hedge fund has filed papers with the SEC – the US investment watchdog – to go public.

   Och-Ziff Capital Management, with 700 investors and $28 billion under management, wants to raise $2 billion. The obvious question is, what for?

   If the company needs to raise funds to invest, why not ask some of the world’s 9.5 million millionaires? Or are the world’s wealthiest people getting a little tight with the purse strings? And if so, what could that mean?

   First things first – use of proceeds. According to the Financial Times, “The prospectus said the firm would use a $750m loan to make a distribution to its 18 partners after the listing, and the partners would reinvest all the proceeds in the company’s funds.”

   Hmmm...so a loan equivalent to 38% of the money raised in the IPO will be used to put $750 million directly in the pockets of the fund’s 18 partners. Has the hedge fund industry found a way to outsource $41 million in salaries directly to the public? It would appear so. And it doesn’t appear to require any outstanding performance, either.

   The phrase “run like you stole something” comes to mind. No one is being robbed against their will, though. The argument for hedge funds going public, as advanced by the new anchors on CNBC, is that in a competitive financial world the creation of equity which can be given away as an ownership stake is the only way to retain top talent.

   Capricious annual bonuses in the millions of dollars are simply not enough to keep the best minds on the payroll. Ownership is what counts.

   The public must therefore step up and subscribe to hedge fund IPOs so that the masters of the universe can keep said universe in an ever-expanding-but-highly-volatile-state. This is multi-million dollar work, and it seems to be good work if you can get it. But don’t try it at home, folks. And if you do, don’t blow your hedge fund up, as happens from time to time. That’s just wasted time and capital.

   What a world! At least in the first age of industrial capitalism, the villains – the robber barons – were captains of industry. They were entrepreneurs who made fortunes building business empires. Those empires were made up of companies that made actual things like steel, railroads, electric motors and cars.

   These men may have been ruthless and penny pinching. But at least they had worthy ambitions like world domination.

   What would men like George Westinghouse, Henry Ford, or Andrew Carnegie say about today, the age of the money-shuffling capitalist? They probably would have recognized the species. It thrives during late, degenerate capitalism.

   There were plenty of these men around in the late 1920s too, no doubt, right in the terminal phase of the credit cycle. This is the phase where growth in the money supply and cheap credit creates grossly distorted incentives, both economic and personal.

   In this phase, you don’t find many men like Lang Hancock, who go into business to realize a vision. Instead, you find men who go into business to allocate capital, to make money by moving money.

   There’s nothing wrong with that, of course. Somebody has to do it. And they may as well do it well, instead of screwing it up and flushing the world’s available savings down the pan via a high-risk investment.

   But when the most talented men and women in the workforce want to manage money – to get gloriously and effortlessly rich through expanding asset markets – well, something is rotten with man, economy and state.

   That’s where we are today, it appears. Things couldn’t possibly get any better. But they keep on doing just that, hour to hour and day to day. But not, probably, until the last syllable of recorded time.

Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles
 

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