BusinessWeek Logo

Tracking Hedge Funds (Where's Waldo?)

Posted by: Michael Mandel on June 19

In the popular children’s book series Where’s Waldo?, you look at complicated cartoons and try to find the little character Waldo.

For years (literally!) I’ve engaged in a variant of that game, which I call “Where’s the Hedge Funds? I’d look at the quarterly Federal Reserve Flow of Funds release—filled with 100+ pages of small type about all the flows of money around the financial system—and tried to find the hedge fund industry in the statistics. But no matter how hard I peered at the numbers, no matter which microscopic table I looked at, I could not locate the hedge funds. Since globally hedge funds had well over $1 trillion in assets before the meltdown last fall, this was a bit…surprising.

But the Fed has finally relented and told us where the hedge funds are in the numbers. In the latest Flow of Funds release (June 11), we learn that Waldo—I mean, the domestic hedge funds—have been all this time in the household sector.

What? Hedge funds are in the household sector? Silly me—all this time, I thought that hedge funds were part of the financial system, and now I find out that they are ‘officially’ part of the household sector. For example, table F.100, the critical table which tracks the borrowing and lending of households and nonprofit organizations, now has a cute little footnote which reads:

(1) Sector includes farm households and domestic hedge funds.

In the previous release, March 2009, the same footnote read

(1) Sector includes farm households.

I could be wrong, but it looks like even though the footnote has changed, the numbers are basically the same.

Why is this important? Because the Fed Flow of Funds account is our best source for statistics on household borrowing. And now, it seems, the household debt figures include hedge fund leverage. Whoa!

Maybe that makes a difference, maybe it doesn’t. But it raises the possibility that when we saw the big increase in ‘household’ debt in past years, we were partly picking up an increase in hedge fund leverage. This effect could be significant, since during the go-go years,hedge funds often borrowed enormous amounts to magnify their returns. And when we see a reduction of household debt now, part of that may reflect hedge fund deleveraging.

You can’t see, but I’m scratching my head right now. Someone may have already known this, but I didn’t.

TrackBack URL for this entry: http://blogs.businessweek.com/mt/mt-tb.cgi/

Reader Comments

CompEng

June 19, 2009 04:32 PM

Thank you so much for your efforts. Every time I hear something like this, the craziness of what I read in the media makes a little more sense to me. Truly, the devil is in the details.

Ajay

June 20, 2009 08:41 AM

Certainly makes your hand-wringing articles about the recent growth in household debt look silly, right? Looking at the decline in household assets recently, it strikes me that for all the hype about home values, most of the loss is in equities, which are currently undervalued. So it appears that this is mostly a crisis of confidence, people don't know where the next boom will come from so they're being very pessimistic right now. It is also striking how we've had two fairly irrational booms in such close succession, though both had some fairly solid underpinnings, in tech and productivity gains. I think people instinctually know we're on the verge of a big tech-driven boom- Greenspan certainly thought so in the '90s- they just don't know where it's going to come from. I claim that if we'd have deployed a micropayments system in the '90s, this big tech boom would have started then. Pets.com would still have been a dumb idea but it would have been consolidated into some better company, rather than disappearing into the ashheap of the dot.com bust. Oh well, this next boom will start when micropayments are deployed and irrational exuberance will once again spring unfounded. ;)

Mike Mandel

June 21, 2009 04:10 AM

Ajay...

I'm always willing to search out new data and reporting, without worrying about whether it supports or challenges my previous arguments.

Ajay

June 21, 2009 06:38 AM

Glad to hear it but this news really just absolves you of your previous argument that the debt was a worrying trend, which I argued against even if wasn't the hedge funds' fault. Ultimately, I don't think it's the best use of your time pontificating on these govt stats, that are always going to be rife with measurement problems. Talk to companies on the ground, find trends in what's changing, and report on them. The govt stats are misleading at best, irrelevant at worst.

Mike Mandel

June 21, 2009 07:59 PM

Ajay--There are two levels of reality. Stories about individual companies and people are real and important. But government stats are possess a reality all their own, because that's the only way we can get "the big picture." I think a lot of the reason we ended up in the mess is because the stats gave us a misleading big picture.

Ajay

June 22, 2009 11:12 PM

Right, my point is that you can only really focus on the smaller picture as there is no reliable big picture. When the boom was expanding, you could have gone digging for why so much money was being dumped into housing and traced it back to the idiot financiers. Better to find interesting stories like that because there is no reliable view of the big picture, as such "big picture" stats are rife with measurement errors. The old saw about looking under the lamppost for your keys cuz that's where the light is and all that. ;)

Henna

June 25, 2009 12:32 PM

Its news like this that makes me love Businessweek!
Good job

Post a comment

 

About

Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

RSS Feed: Economics Unbound

BW Mall - Sponsored Links