The perfect partners

There is a very easy way to make opponents of capitalism go beserk. All you have to do is say two words.

I don't mean "Adam Smith", the Scottish economist who is often (wrongly) seen as the father of free-market extremism. Nor do I mean "market forces", often code for the madness of unbrindled capitalism.

No, the two words are "hedge funds". Most people, including myself, don't really understand exactly what these institutions do. But they are seen as the epitome of financial evil.

A good definition of hedge funds is: “privately organized, loosely regulated and professionally managed pools of capital not widely available to the public.” For a more detailed description, see here.

Among the reasons why hedge funds are so unpopular are: (a) we don't understand what they do; (b) they don't seem to be regulated properly; (c) they charge high fees for managing investors' money; (d) they are used mainly by the very rich; and (e) they follow strange investment strategies such as "short selling" — that is, selling shares they don't own.

Those who see hedge funds as evil will have enjoyed with great schadenfreude the recent news that a billionaire Wall Street hedge fund manager, Raj Rajaratnam, was arrested and accused of making millions of dollars through insider trading — that is, illegally using information about companies that is not available to the public.Rajaratnam's Galleon Group has now said it will close all its hedge funds.

Although I believe all alleged criminals should be arrested and prosecuted, I found another recent story about hedge funds more interesting.

This was the news that some hedge funds are financing divorce cases in which huge amounts of money are at stake. This is part of a wider trend of hedge funds financing high-risk litigation in return for a share of the payout.

As banks have become more reluctant to provide loans for expensive divorce cases, hedge funds have moved in to fill the gap, as they look for new ways of providing investors with high returns. You almost have to admire their ingenuity.

And for those who want someone to project their anti-capitalist anger onto, what could be a better combination than hedge funds and divorce lawyers?

The next blog post by Ian McMaster will appear on Monday, 2 November.