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Hedging to Glory

Catastrophe buffs warn that the next global financial cataclysm will involve some massively overextended hedge fund that makes the wrong …

Catastrophe buffs warn that the next global financial cataclysm will involve some massively overextended hedge fund that makes the wrong bet on natural gas or Indonesian munis or the weather, and destroys life as we know it. Frankly, this can’t happen fast enough to suit me. I can remember a time when you could open the New York Times or the Wall Street Journal without having to wade through 24 breathless stories about the latest thrilling adventures of intrepid hedge fund managers. Hedge funds are backing Tom Cruise. Hedge funds are taking over the art market. Hedge funds are entering the philanthropy arena. Hedge funds are buying up sports franchises. Hedge funds are disrupting the London real estate market. Hedge fund managers are exactly like employees of the federal government: They seem to be everywhere, but nobody knows what they do.

The term “hedge fund” is now a misnomer. Hedge funds were originally designed as defensive institutions that could take both long and short positions, which mutual funds could not. For decades, they remained mysterious and obscure, with negligible assets, in part because shorting companies was viewed as anti-American. Hedge funds today, leveraged to the hilt, do not hedge; they gamble. And they gamble on everything. This is what makes them so incredibly annoying: With 9,000 hedge funds out there, it’s impossible to go anywhere without hearing yet another story about hedge funds.

Last September, after Amaranth Advisors squandered $6.5 billion of its $9 billion in assets, I started to keep a file of prominent newspaper stories about hedge funds. The file is now gargantuan; with 40 times the assets they held 15 years ago, hedge funds are now popping up everywhere.

When Tom Cruise ran aground in Hollywood, it was a hedge fund that offered to come to his rescue. When Andrew Cuomo needed money to get his career off the ground, it was the killing he’d made with a hedge fund that enabled him to do it. Hedge funds would like to be loved, but this is proving to be a tough sell. Naming a hedge fund Viper Capital Management probably doesn’t help. Basing hedge funds in mysterious Caribbean nations doesn’t help either. Not for nothing are hedge funds widely viewed as secretive and poorly regulated. Not for nothing are hedge funds often accused of being cunning dodges to avoid paying taxes. This is why John Edwards’ stint at a hedge fund has seriously undercut his image as an awshucks populist. Remember, the villain in last year’s Casino Royale was a hedge fund manager.

I personally don’t care what hedge funds do or how they do it. I simply wish they would get down to the serious business of ravaging our financial system the way portfolio insurance and junk bonds did in the ’80s, and the way the dot.com start-ups did in the ’90s, so that we as a society can turn the page, put hedge funds behind us, and start dealing with the next fad that will imperil our civilization.

I am sick and tired of opening the newspaper in the morning and reading that the SEC is steamed at hedge funds-ha-ha!-or that the German government wants hedge funds to devise a code of conduct-ha-ha!-or that the bozos who lost $6.5 billion of their investors’ money after their last hedge fund took the pipe are ready to open another one-ha-ha-ha! I am sick of books like Hedge Funds for Dummies, sick of TV shows starring hedge fund analysts, sick of second-tier car races operated by hedge funds.

Not long ago, a dominatrix plying her trade in the suburbs of New York brought charges for false arrest and harassment against a policeman who allegedly prodded her into a secret encounter in the woods. One of the woman’s main complaints was that the notoriety arising from the case was making it difficult for her to fulfill her ultimate dream of landing a job at a hedge fund. I don’t see why. Everybody else seems to work for them. Why not a kitten with a whip?

About Joe Queenan

Joe Queenan is a regular contributor on business issues, corporate culture, and financial follies to Barron's and The Wall Street Journal.