Agents & Australia

I was always puzzled when people raved about Australia. Growing up in South Africa, one far corner of the British ex-colonies, I never had any great desire to recreate a South African lifestyle in another distant corner of the Empire, and so I always imagined I wouldn't particularly like the country. Maybe I had a very post-WWII attitude, where England, Europe and America darkened and crowded the horizon and seemed like the attractive center of the world. Now, maybe, I've gotten tireder and kind of like less central places. There's something familiar here. It feels like South Africa with the Africa part removed, which sounds like it could be bad, but isn't.

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I have been to many meetings in business offices here, and in every one there is a jug of icy water and several glasses on a tray in the center of the table. In the US, it's always bottles of Poland Spring, or offers of coffee or tea, and here it's always iced tap water. Nice.

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Someone from a pension fund here commented: if you put your money in a hedge fund, doing say fixed income arbitrage, and a year or so later the economic environment becomes bad for FI arbitrage, it is very unlikely that the hedge fund manager will say: "You know, you ought to redeem your investment. This isn't a very good time for what we do."

This is the realm of agency theory. In the 1970s, academics justified the golden parachutes awarded to CEOs by arguing that, if the CEO were to receive a golden parachute as a result of losing his job as the result of a merger or acquisition of his company, the job loss wouldn't threaten him and would allow him to remain objective about the benefits to the stock holders he represented of the possibility of a merger, irrespective of what happened to him. Nice theory.

So, why not golden parachutes for hedge funds too? Under my scheme, when you invest in a hedge fund, you promise to keep paying them fees and incentives even if you redeem your investment.. That way, the hedge fund manager will be free to tell you when you would be better off putting your money to work elsewhere.

G'day. They actually say that.