Investing

What’s A Hedge Fund, Mom?

Posted by Jean

This morning, as we were rushing to stuff lunches into already over-loaded backpacks, grab the tennis rackets and coats (because despite the fact that it’s officially spring, it was 20 degrees outside) my 14-year-old hit me with this question: “What’s a hedge fund, mom?”

I backed into an answer.

Me: Do you know what a mutual fund is?

Him: Ummmm….

Me: It’s usually a bunch of investments in stocks or bonds or both bundled together.

Him: Okay.  (He turns and walks out the door and then, realizing we are having a conversation shouts,) I’m still listening.

Me: Well the whole point of a mutual fund is that if one of your stocks or bonds is losing money, the rest of them may not be so you won’t end up losing your whole investment.   That’s called “diversification.”  Anyway, a hedge fund invests a whole bunch of investments at the same time too, but many of them are riskier than stocks and bonds.  So for the most part only wealthy people are allowed to invest in them.

Him: Do you?

Me: Do I what?

Him: Do you invest in them?

Me: No.

Him: Can you put on Z-100?

And that was it.  For now.  My mother once advised me that you should answer kids’ questions directly.  They know how much information they can comfortably take in and they’ll ask only for what they can stomach.  And when they’ve had enough, they have a way — “Can you put on z-100?” — of letting you know.

But how about adults?  Are we, in this financial crisis, taking in the information we need?  Or is there so much that many of us are simply unable to digest it?

I was thinking about this on my way home, when after dropping the kids off I switched from z-100 to Imus.  His guest, Rolling Stone’s Matt Taibbi has a 10,000 word piece in the latest issue dissecting the financial crisis.  Taibbi, who is an excellent reporter and terrific writer, spent 4 months he said just getting enough of an education on the meltdown to put pen to paper.  (Be warned.  Taibbi is angry and believes the rest of us aren’t “angry enough.”  The piece is not for the faint of heart.)  He says ordinary mortals need to understand credit default swaps and collateralized debt obligations in order to understand what happened here — and how to move forward.

You should read the piece.  Just as you should read the Paul Krugman editorial in the New York Times today slamming the Timothy Geithner public-private investment partnership as “cash for trash.” Just as you should tune into as much of the discussion as you can handle without getting a major migraine.

This mess, as I’ve said for a while, is like a closet in the midst of a cleaning.  It’s going to look worse before it looks better.  And it’s going to take time — lots of time — before it looks moderately good.   In the meantime, when your 14-year-old wants to know the answer to a little piece of the financial puzzle, you’ll have one.