This is a quick summary and reflection on an excellent NPR piece about hedge funds and illegal insider trading. Give it a listen!
The concept of hedging your investments is pretty common. Don’t put all of your money into one type of investment. Diversity is good: in case some types of investments do poorly, all your money won’t be lost.
Hedge funds came about as an investment for the ultra wealthy to hedge against downturns in the market. They could give a bunch of money to financial firms who would have wide latititude over how to invest it. They could rapidly make trades that were potentially risky but with high potential for reward, including short selling, which is basically betting on downturns in stocks. These types of investments would come with high fees that the hedge fund managers collected for the very hands-on management, research, and networking that goes into it. Financial regulators decided to approve hedge funds because only the super rich were contributing to them, and could afford the risk and potential losses.
Over time, these hedge funds were extremely successful, with some firms posting such astronomical results that many (including the FBI) started asking questions about inside information and other types of illegal trading. It’s easy to imagine how the combination of big money and flexibility would encourage traders to gain inside information or at least blur the lines of it. Hedge funds are now one of the largest types of financial investments, increasing volatility in the entire financial system. Trading in huge amounts of money is now being performed based on tiny tidbits of information and day-to-day developments in news and sources coming out of corporations. What are the effects of incredible amounts of wealth creation based on no tangible production of goods? This has to trickle down and hurt the average person.
When I listened to this story, the thought occurred to me that these hedge funds are the modern day equivalent of Jesus’ parable of building bigger barns. Why is it that the super rich seem to be obsessed with gathering even more wealth when they clearly have more than they could ever need?
Here’s the parable:
Jesus said, “Watch out! Be on your guard against all kinds of greed; life does not consist in an abundance of possessions.”
And he told them this parable: “The ground of a certain rich man yielded an abundant harvest. He thought to himself, ‘What shall I do? I have no place to store my crops.’
“Then he said, ‘This is what I’ll do. I will tear down my barns and build bigger ones, and there I will store my surplus grain. And I’ll say to myself, “You have plenty of grain laid up for many years. Take life easy; eat, drink and be merry.”’
But God said to him, ‘You fool! This very night your life will be demanded from you. Then who will get what you have prepared for yourself?’
This is how it will be with whoever stores up things for themselves but is not rich toward God.” (Luke 12:13-21)
There’s a limit to how literally this can be taken, but it helps raise the questions of what is the point of our lives, and what should we do with excess money.