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Bullying of the Hedge Funds and Capitalism

Zero Hedge posts an open letter from Cliff Asness, the manager of AQR Capital decrying Obama’s strong arm tactics in pressuring the dissenting Chrysler bond holders to accept the White House plan of reorganization and accept proposed  reductions in the debt value. As a fervent believer in the capitalist system, Cliff argues that the primary responsibility of the hedge funds lie in protecting the capital entrusted to them by their clients and if the funds feel that a better value can be realized through liquidation of Chrysler assets, than they are right to stand their line. Obama, as you recall had called for these bond holders to back down by ‘making sacrifices’ and called them speculators who wanted to hold out for the prospect of an unjustified taxpayer-funded bailouts.

I agree with Cliff in that the funds will be neglecting their fiduciary duty to their clients if they caved in and took a sub-optimal path. If the market forces decide that the only way forward for Chrysler is liquidation, than so be it. Chrysler is obviously not needed in the market today as there is still an oversupply of vehicles and low demand. Yes, they support many jobs in the United States, but one has to wonder if these jobs will not be lost anyway as the auto production will surely adjust to reflect the market realities. Maybe the government run process buys some more time for Chrysler at the expense of sacrificing the returns to the bond holders and their investors and risking taxpayer capital. On the balance, losing these jobs now with Chrysler liquidation may indeed be a better option for the society as a whole as it will also give a breathing room for surviving auto-makers to cut inventory and eventually gain market-share and turn a profit (and help them not having to make deep job cuts later on).

So yes, I applaud Cliff for his principled stand.

But hedge funds did have a role to play in the complete breakdown of the financial system in US. In theory, excessive leverage and mishandling of risk  in pursuit of alpha is never healthy and if you consider the number of hedge funds following few limited strategies and the amount of capital at risk, it is unfathomable that we were not troubled by this earlier. But this is capitalism, and hedge funds that do not perform enjoy cash draw downs and are eventually shut off. So who am I to complain :-)

Creative destruction should be allowed. For hedge funds, and for industry.

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