In Making a Million Bucks an Hour: How Hedge Funds Get Away With Sipho... Les Leopold illustrates how the ultra-competitive structure of hedge funds pressures hedge fund managers toward sociopathic behavior. The bottom line is that to succeed they must manipulate markets, "According to Jim Cramer, if you don’t engage in illegal rumor-mongering to manipulate the market, then you shouldn’t be running a hedge fund".

Stout says that hedge funds, “both individually and as a group, can send at least three powerful social signals that have been repeatedly shown in formal experiments to suppress prosocial behavior.” They are:

Signal 1: Authority Doesn’t Care about Ethics.

Signal 2: Other Traders Aren’t Acting Ethically.

Signal 3: Unethical Behavior Isn’t Harmful.


My take is that hedge fund managers balance on a quivering knife edge. Every quarter their numbers must absolutely look great or their investors will immediately pull out and crash the fund.

... when there were only a few days to go till the quarter ended, and when you knew that if you didn ’t post good numbers, your investors would walk out on you. “ What would you do if you were in that situation and you feel like you ’re desperate? You would do these actions.”

 

In desperation they resort to rumor mongering, price fixing, and other illegal behavior just to stay afloat. If not, they aren't hedge fund managers any more, they're bankrupt and humiliated. This selection pressure is structural.

Could a more powerful argument be made that our current economic system is dysfunctional?

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Tags: hedge fund management, illegal activity

Views: 21

Replies to This Discussion

"they resort to rumor mongering, price fixing, and other illegal behavior just to stay afloat."

It is clear our nation needs a good lesson on morals and ethics. When greed is good and lying is legal, we sit in deep doodoo. 

Pinocchio, a symbol of mendacity.

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