What I know about hedge funds wouldn't fill a Post-It Note. But the little I do know about them seems a bit sketchy. Not all of them, mind you. Just the ones that are banking on the demise of the US economy. For example, T. Boone Pickens, a legend in oil and gas across the globe, has his own hedge fund, BP Capital. They bet that oil prices would rise beginning in 2005 and it ended up making him over $1.5 billion dollars that year. Yes, billion. So basically it's like gambling in Vegas but for mega-rich businessfolk. And the "big game" they're betting on is real life. Are rising oil prices good for the average Joe? Of course not. And isn't it a bit odd that one of the world's richest men, who hangs with the most powerful and influential businessmen and women across the globe, is hoping for gas prices to reach $4.00 a gallon? I'm not saying Mr. Pickens assisted in the rise of oil prices but if anyone had the power to make this happen, it would probably be him. There is an inherent conflict of interest here and his gain is the average Joe's loss.
Blanche Evans discusses this phenomenon using Robert Shiller, a finance professor at Yale University. Apparently he's a pretty important guy and makes up one half of the S & P Case-Shiller real estate pricing index. According to Evans, the Case-Shiller Index wields quite a bit of influence on how newspaper headlines read across the country and are notoriously pessimistic. We all know how doom and gloom headlines can -and have - affected the psyche of today's home buyers. And it's interesting to note the Case-Shiller index tells a different and much more disheartening story than 3 other well known real estate indices. But here is the kicker from the Evans article.
"The Case/Shiller Index is licensed by Macromarkets LLC. In partnership with the Chicago Mercantile Exchange, Macromarkets created the "Housing and Futures Options" for trading. The CME Group, a Chicago Board of Trade Company, describes trading housing futures as having multiple benefits to investors:Is this not a glaring conflict of interest? Isn't there a huge opportunity for abuse here? Is this a good thing for the powerful and ultra-rich to bet on economic downturns?
- A new means of risk transfer to a broad range of investors
- Low cost exposure to real estate values without direct ownership of properties
- Access to a unique asset class
- Opportunity to profit from a movement in housing prices
- A way to make trading in real estate a short-term and liquid investment
This is a hedge product, folks, and guess who one of the owners of Macromarkets LLC is? None other than Shiller.
"Every time a CME hedge is made, revenue flows to Macromarkets," says Lawrence Yun, senior economist for the National Association of Realtors. "People would hedge only if they believe prices will fall big time."