Hedge Fund Reform Finally Pushed By Investors

Two years ago I detailed the misalignment of incentives in the standard hedge fund fee structure and concluded:

It is obvious that this needs to involve delayed vesting of performance fees.  Performance fees should be kept in escrow with a vesting period much longer than one calendar year.  [D]elayed vesting will keep [managers’] skin in the game even if they have a big drawdown.

Sadly, it took last year’s experience of enormous drawdowns and fund failures for the biggest investors to begin to demand this reform.  Finally Calpers, one of the biggest hedge fund investors, has had enough.  WSJ reports it has sent a memo to funds in which it invests outlining its expectations.

One area Calpers is focusing on includes performance fees. Typically they are collected at the end of each year, but Calpers instead wants fees spread out over several years. Calpers also wants clawbacks, which allow clients to recoup fees from previous profitable years after a period of poor performance.

And that’s not all.  In December I highlighted another major problem with traditional hedge funds: opacity.  I predicted major investors would begin to demand transparency into strategies and positions.  This is also part of the Calpers request:

Calpers also wants money managers to disclose every security held in a fund. “The only issue that keeps hedge funds from providing security transparency is their lack of cooperation,” Calpers spokeswoman Pat Macht said in an interview Friday.

The Case for Government Investment

As a libertarian I like to believe that anything worth doing will be done by for-profit entities.  But we know that in practice there are many public goods and services worth providing that will not be provided in anarchy — typically because they suffer from at least one of three characteristics:

  1. They require more up-front or concentrated capital than private entities can reasonably provide.
  2. Potential returns are too risky or distant, rendering the risk/reward calculus untenable for a profit-seeker.
  3. Returns are too difficult to capture for a non-government entity (practically by definition of a public good).

If public infrastructure investment can reliably increase economic activity, then not only can government capture returns on the investment through constant-rate taxes on a growing economy, but it would even be reasonable to fund the investment with government debt.  This is, in broadest terms, the premise for a large amount of the Obama administration’s proposed deficit spending.  Robert Reich today presents a reasonable argument based on this premise:  He suggests that the United States grows and competes internationally based on its productivity, and that public goods like a ready base of strong human capital and infrastructure are critical to growing productivity.

Only those Americans whose parents can afford to give them a high-quality private education and health care, and who can situate themselves in locations with excellent infrastructures of telecommunication, transportation, public health and safety, have been able to link up with global capital on more positive terms. But not even they are entirely secure economically, because they face growing shortages of talented people they can rely on within easy reach, and can’t entirely avoid the disadvantages of a deteriorating public infrastructure, such as ever more congested roads and airports.

Obamanomics recognizes that the only resource uniquely rooted in a national economy is its people — their skills, insights, capacities to collaborate, and the transportation and communication systems that link them together. Public investment is the key to attracting long-term private investment so that a nation’s people can prosper.

Battlestar Galactica Final ClusterFrack

This decade’s “reimagining” of Battlestar Galactica began with a good season (so long as you could get past the fact that many quintessentially male roles were filled by female actors, and that these females were still saluted with “sir” instead of “ma’am”).  But it went downhill from there: the final season, which just finished airing, was an unmitigated disaster.

The original (1978) series was interesting because it was based on some unusual tenets of Mormon theology.  I hoped that the new season would continue that theme: Mormon theology has many rich and unique facets that could serve as both the backbone and details for a strikingly original epic.

The new series did not abjure religious allegory, but what it did weave into the plot was slapdash and superficial and, worse, was mashed together with current references to the War on Terror.  Early seasons opened so many plot threads that it would take great skill to keep them on track and tie them up in an elegant bow by the final episodes.  Tragically, the final season’s amateurish screenplay seemed like it was put together by a committee of junior high schoolers: They rushed through critical plot points that could not be easily salvaged, and then filled out the script with melodramatic soap-opera fare.

If you haven’t watched any of this series, don’t bother.  And if you haven’t finished, don’t expect any sort of coherent resolution.

Judy Shelton, the Wall Street Journal’s Gold Bug

Judy Shelton published a book 15 years ago advocating a return to gold-backed currencies.  She has few credentials and no online presence or ongoing academic involvement that I have been able to find.  But almost every month for the last year the Wall Street Journal’s editorial page has printed an essay by her that, ultimately, argues for a return to gold-backed currency:

As I have previously written, concerns about dollar integrity are certainly justified: The central bank and government are colluding to try to print their way out of a financial crisis.  And as our government compounds its borrowing it will face increasing incentives to simply inflate its way out of debt.  Today’s WSJ has an article about the increasing money supply showing that money creation has been more than offset to this point by the Great Delevering of this crisis.  No inflation will occur until the former overcomes the latter, although the more the money supply is built up in advance of that tipping point the greater the risk of a “snap” inflation that the Fed cannot easily unwind.

I agree that nobody with significant assets should count on the dollar or any other fiat currency to conserve value.  But as I have explained before, the point Shelton and other gold-fanatics gloss over is that nobody has to: While fiat currencies are generally the most liquid and fungible medium of exchange, markets offer many practical means of avoiding currency valuation risk.

Derivatives markets for currencies and interest rates are enormous and efficient, allowing any particular currency risk to be priced and neutralized.  Dollar inflation insurance can be purchased explicitly through inflation-protected bonds: Another article today quotes a bond fund manager reiterating my view that TIPS are currently bargain insurance.

Currency owners are also free to store and trade value using many other media — including gold.  For small fees, an individual can convert dollars into gold, and then back into any currency to facilitate trade.

Governments cannot be counted on for “sound money,” but capitalism has given us efficient means to create it ourselves.

The Battery Breakthrough we’ve been waiting for

MIT researchers have produced a lithium battery that can charge and discharge almost as quickly as a supercapacitor.  David notes that coupling the energy density of a battery with the power density of a capacitor would make electric cars far more practical: Smaller battery packs could provide extreme torque and full brake regeneration.  You could also fully “refuel” an all-electric car in minutes.

Granted, having solved the power density problems with electric batteries we still won’t be happy until we can also boost stored energy density a few orders of magnitude.  But current lithium chemistry has probably taken us close to the limit of electrical energy density.  Batteries that can store more energy per weight will have to rely on chemical (e.g., fuel cell), nuclear, or antimatter reactions.  (Kinetic batteries like flywheels in practice have not been able to achieve higher energy density than lithium eletric batteries.)

There Is No Such Thing as Nuclear Waste

I quoted William Tucker last year on this subject when I pointed out the absurdity of our country’s executive ban on recycling our own nuclear fuel.  The new administration might actually be taking a step in the right direction on nuclear energy policy since they apparently intend to terminate the Yucca Mountain boondoggle.

Today Tucker explains in greater detail how wasteful it is to not recycle spent nuclear fuel (emphasis mine):


Ninety-five percent of a spent fuel rod is plain old U-238, the nonfissionable variety that exists in granite tabletops, stone buildings and the coal burned in coal plants to generate electricity. Uranium-238 is 1% of the earth’s crust. It could be put right back in the ground where it came from.

Of the remaining 5% of a rod, one-fifth is fissionable U-235 — which can be recycled as fuel. Another one-fifth is plutonium, also recyclable as fuel. Much of the remaining three-fifths has important uses as medical and industrial isotopes. Forty percent of all medical procedures in this country now involve some form of radioactive isotope, and nuclear medicine is a $4 billion business. Unfortunately, we must import all our tracer material from Canada, because all of our isotopes have been headed for Yucca Mountain.

Assorted Links

  1. Which country’s citizens enjoy the greatest international freedom of movement?  The United States is close, but not quite at the top.
  2. Affluence and Ethics — a book review that includes a practical answer to the moral problem faced by most developed-world citizens: How can we justify any discretionary consumption when the same resources could save lives in the developing world?  (Hint: One might say, “The world is not flat.”  Resources cannot simply be shipped anywhere in the world to alleviate pain and suffering, nor is the third-world clearly held back due to lack of resources.)


Michael Lewis has a thoroughly fascinating description of a tiny, inbred island nation that managed to blow a huge bubble in the global markets (that just recently burst in spectacular fashion).

Back away from the Icelandic economy and you can’t help but notice something really strange about it: the people … are presented with two mainly horrible ways to earn a living: trawler fishing and aluminum smelting. There are, of course, a few jobs in Iceland that any refined, educated person might like to do. Certifying the nonexistence of elves, for instance. … But not nearly so many as the place needs, given its talent for turning cod into Ph.D.’s.

Read the entire thing.

Better that 99 go unaided than 1 be improperly treated

Wyeth v. Levine struck me as a horrendous decision.  As the WSJ summarized from the dissent:

Justice Alito’s larger point is that “drug labeling by jury verdict” undermines the workability of the federal drug-labeling regime. Juries are presented with tragic plaintiffs who were injured, not the unknown patients who are helped, by a product. Hence, they tend to focus on risks more than overall benefits. By contrast, federal regulators are tasked to take the long view and factor in the interests of all potential users of a drug.

The existing regulatory tax (i.e., the FDA approval process) on development and sale of drugs is already so high that consumers are certainly being harmed, being deprived of life-saving products that would otherwise be available to them.  This decision now allows individual states to unilaterally impose additional tort taxes, which harm the ability of interstate corporations and consumers to engage in mutually agreeable commerce.

I searched the blogosphere trying to understand how six of this Supreme Court’s judges could have backed this decision (best summary is here).  The only supportive analysis I could find suggested that this decision was really about federalism: preserving the rights of the states to not be preempted by the federal regulation.  But Overlawyered has a concise rebuttal to that notion:

Federalism is a two-way street, and permitting states to impair interstate commerce through a litigation tax upsets the federalist structure of the Constitution.

Stevens’ majority opinion notes, “Congress has repeatedly declined to preempt state law….”   So hopefully Congress can promptly close the floodgates of harmful litigation this decision just opened.

Public Pension Scam Update

I’ve previously explained how unions and politicians conspire to surreptitiously rob taxpayers using the obfuscation of pension costs. Indeed, as one blogger said, “Government employees live in a different world,” something that becomes more evident during an economic downtorun.  Richard Epstein rehearses the intricate details of this ongoing scam:

So what happens in bad times? First, no public employee loses either a job or a dollar in pension benefits. Ordinary citizens lose two ways: jobs are cut–unemployment in California just hit 10%–and taxes are raised. What makes this pill all the more bitter is that unions happily wave the libertarian banner of freedom of contract to lock in the status quo. Public unions point to court cases that require the state to honor its employment contracts just like other agreements. Translation: The downturn is everyone else’s problem.

This seductive plea of contractual probity ignores the dubious mechanisms that put these obligations into place. State collective bargaining agreements give unions monopoly power; state legislative maneuvers, often backed by pro-union legislators, sweeten the deals already made. These pension deals are never negotiated at arm’s length in competitive markets between parties who are free to go elsewhere. Instead, a monopoly union extracts its compensation packages from government officials, many of whom depend on union support to hold public office. These contracts are the kind of self-dealing arrangements that would never be tolerated between a corporation and its key officials. And the subsequent sweeteners simply take property from the majority of citizens who can neither block the transaction nor withhold their tax dollars.

Unfortunately, there is today no mechanism in place that allows frustrated citizens to challenge the validity of these agreements either before or after they are put into effect.

What Are We Really Giving Up?

Carrot or stick.  Silver or lead.  Government, like organized crime, tends to present you with immediate rewards and penalties that leave any reasonable person with no choice but to comply with their wishes.  It does not often make it clear what the true long-term cost of compliance is in terms of liberty.

I have pointed out how government-provided healthcare naturally and morally justifies government intervention in unhealthy personal behavior.  Now James Bovard at PA-AAPS points out the darker side of government-mandated computerization of medical records.  Granted, there are good arguments for this movement — improved healthcare efficiency, error reduction, cost savings.  The current government has decided that it has an interest in forcing the issue, so it is offering the carrot of funding for the transition and suggested that it will soon apply the stick of financial penalties to healthcare suppliers that resist.  But Dr. Bovard warns: Once government has paid for your private information, it owns it.  And don’t be surprised if it chooses to use it in ways you dislike.