Tracking Hedge Funds (Where's Waldo?)
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.