So the Fed came to Mr. Market's rescue today, sort of. As everyone's aware -- even those who live under rocks could have heard the crying -- tighter lending practices and plummeting mortgage securities led to some major moves in the market over the past few days.
The press likes to pretend that "investors" were the reason, by which I assume they mean my buddy Fooly McSixpack and me, but I'm beginning to wonder. There's an awful lot of talk about the enormous volume generated by computer-generated buying and selling by so-called "alpha quantitative" hedge funds out there, like the famous incredible imploding funds at Goldman Sachs
The general idea seems to be this: "Alpha" is the term given to price appreciation that comes from brains, the spread over the market's return, whereas "beta" is the stuff any monkey can get -- it's just the market noise itself. Because these folks running these funds are wicked smart investors, the sales literature tells us, they will be all over the alpha. They shower in alpha. They eat it on their toast. They've been soaking in alpha ever since they were plank-spanked into nominal, fraternal submission at Alpha-Beta-Gamalon. And they've created "quantitative" models to run on their computers that ensure they always make the right moves.
Now, because they're that good, they can make bets on borrowed money, leveraging up the funds to get extraordinary, market-beating gains. Well, that's the idea, anyway.
Of course, extraordinary, market-beating losses are what led to Goldman's "It's-not-a-bailout moment." And you can bet that many of the alpha boys out there won't have friends with such deep pockets. No one's sure just how many alpha funds are hurting these days, because the hedge fund biz values secrecy even more than fancy suits, Greekish wonk-talk, and fancy-sounding nonsense. The rumor-pickers at Dealbreaker.com and Hedge-Fund Implode-o-Meter are trying their best to stay on top, but to me, what's more interesting than who blows up, or how many, is why, and where the trouble goes next.
Since these funds did so great during a period when the market did nothing but crawl inexorably upward, and failed so miserably when the tide turned, is it fair to say that their previous performance had anything to do with alpha at all? Could it possibly be that the big brains had done nothing more than discover the not-so-secret returns possible to those who magnify gains via leverage?
And if so, where will the rest of the problems land? As more and more baby boomers enter geezerdom with fewer and fewer of us whippersnappers to support them, the race has been on to get pension plan assets performing well enough to make those future payouts. As a result, all manner of government- and business sponsored retirement portfolios have not only purchased those lousy debt derivatives that started this mess, but also handed their money to hedge funds who could promise them above-market returns. Are the realities of the alpha-beta quanties going to drag down future results from the likes of 3M
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At the time of publication, Seth Jayson, a beta-charged, top-10 Motley Fool CAPS player, had shares of 3M, but no positions in any other company mentioned here. See his latest CAPS blog commentary here. View his stock holdings and Fool profile here. Fool rules are here.