Hedge Funds and Unconscious Fantasy, by Arman Eshraghi and Richard Taffler, University of Edinburgh Business School
Are hedge funds objects of desire? In their paper, Eshraghi and Taffler have a novel take on the rise and fall of hedge funds. They say that instead of being vehicles intended to diversify investments across non-traditional asset classes, hedge funds were transformed “in the minds of investors, into objects of excitement and desire, with their unconscious representation dominating their original investment purpose”. The reason: the glamour, secrecy and exclusivity attached to hedge funds, the star billing they received in the media being partially to blame. The industry, of course, did all it could to build up this image. The authors point out, “The hedge fund industry’s unofficial 2006 Annual Conference, Hedgestock, which took place at a stately home just north of London with the slogan ‘Peace, Love and Higher Returns’ consciously sought to appropriate the trappings of the generation of Woodstock.”
The authors say that hedge funds became, in the eyes of their investors, “phantastic objects” in the Freudian sense, with the phantastic object being defined as “a mental representation of something (or someone) which in an imagined scene fulfils the protagonist’s deepest desires to have exactly what she wants, exactly when she wants it”. The similarities with sexual desire are not unintentional. In other words, it’s not so much the desire for higher returns, but their aura of mystery, their cool quotient and their sexiness that attracted investors to things such as hedge funds and dot-com stocks. Consider, for example, the names of some of the funds—Dragonback, Eclectica, Richland, Matador, Maverick, Helios (the ancient Greek god of the Sun), Farallon (radioactive islands) and Cerberus (three-headed mythological creature), among others. The upshot of all this was that the funds exuded a fatal allure and the risk in these products is ignored.
The point is a simple one: investors, even supposedly sophisticated ones who put their money in hedge funds, need to be protected from their own overheated fantasies.
Of Bubbles and Bankers: The Impact of Financial Booms on Labour Markets by Tobias Wuergler, University of Zurich
Bankers are now being reviled as villains, responsible not just for the financial crisis but also shamelessly appropriating profits and bonuses from the public funds used to rescue them. Do bankers really benefit disproportionately from booms? Do they increase inequality in a country? These are the questions studied by Tobias Wuergler of the University of Zurich.
Wuergler shows that, in countries such as the US where deregulation led to the emergence of a vast financial sector, the more skilled and brighter graduates are attracted to the sector, with the result that Wall Street had to employ hordes of mathematicians, information technology engineers and quantitative finance specialists to handle their highly complex products. Asset bubbles are good for bankers because their remuneration is typically a percentage of the value of the transaction. Wuergler quotes a recent empirical study by Philippon and Reshef (2008)—using wage and employment data for the US, they documented that “financial jobs were relatively skill intensive, complex, and highly paid until the 1930s and after the 1980s, but not in the interim period”. That’s because deregulation and consequently financial innovation was pervasive before the 1930s and after the 1980s but not in the intervening period.
Wuergler finds that “the emergence of asset bubbles increases wage inequality and financial sector employment of skilled labour, and the rise is reinforced by financial deregulation”. Second, countries that benefit the most from the deregulation and have, as a consequence, a comparative advantage in finance have the largest inequality. In this regard, the author contrasts the position of the US with relatively egalitarian France. Third, during asset bubbles, wages in finance diverge from wages in the other sectors. And finally, Wuergler delivers the coup de grace to bankers when he says, “In an economy characterized by high savings and low interest rates, there is a high demand for new investment opportunities. Smart individuals might exploit this demand by creating bubbles, such as the latest Internet start-up or CDO squared, especially if opportunities and wages in the ‘real economy’ are not sufficiently attractive. In such an environment, one asset bubble might chase the next, keeping wage inequality at elevated levels. Deregulation and low real investment opportunities could trigger such a cycle of bubbles and high inequality.”
Is the remedy to clip the wings of the bankers then? Not so fast, says Wuergler, making a distinction between the good bankers who do the boring work of traditional intermediation and the evil ones who do “bubble intermediation”. Support the former, he says, but curb the latter.
Illustrations by Jayachandran / Mint
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