Melanie Gilligan

Hedge Fund

Melanie Gilligan (2007)

In a recent interview with Portfolio magazine Tom Wolfe said that if he were to write “Bonfire of the Vanities” again today, hedge fund managers would be his new “masters of the universe”. Such a title fittingly describes not only the prominent cultural influence of hedge fund managers in their newfound roles as powerful art collectors and prime real estate owners (sections of New York and Connecticut are now called Upper and Lower Hedgistan), but more disturbingly their mounting control over global economic wealth. The annual personal profit of the highest paid hedge fund managers (the top three earning over $1 billion a year each) amounts to more than the total gross domestic product of Bahrain, Jordan, Ethiopia or Jamaica. One study estimated assets under management of the hedge fund industries (a group of only 9000 companies) totaled $1.9 trillion in 2006 and grew by 24 % that year. Every week waves of newspaper articles enumerate new ways in which hedge funds dominate the world market. In equity and debt markets hedge fund trading now accounts for more global financial activity than banks do – masters of the planet at the very least.

Hedge funds are unregulated and secretive investment companies that admit only large institutions and extremely wealthy investors. They are unprecedented vehicles for wealth creation, employing a wide range of investing methods including conventional market trading, leverage (i. e., borrowing larger sums in order to increase returns), derivatives such as options and futures, and “short sales”. In their perpetual quest for higher returns hedge funds make often short-term bets on an ever-expanding array of asset classes including not just stocks, bonds, commodities and currencies but anything from securitized debt portfolios (debts converted into tradable capital market instruments) to art works. Hedge funds got their name from a frequently used technique called “short-selling”, a “hedging” method for benefiting from devaluation: by borrowing stocks or other financial instruments, selling them off and then buying them back once their price has fallen the fund profits from the difference. In addition to pure speculation, many funds buy up shares in companies and then seek to increase share values through compelling those companies to change business strategies – which can include cutting costs, slashing wages and downsizing – leadership or capital structure and even force sales.

Since hedge funds are largely unregulated, it is impossible to know how they make their returns. Funds often leverage with the initial investments of their members, enabling funds with large assets and significant gains to pull in enormous sums of money. However, as recent financial crises triggered by losses in highly-leveraged speculation such as Enron or the 1998 bankruptcy of hedge fund Long Term Capital Management have shown, gambling with mammoth sums of loaned capital can potentially have extremely destabilizing effects on the world’s economy. Moreover, hedge funds are unparalleled tools for siphoning money away from other areas of the economy and into the pockets of a privileged few. They exert enormous pressure on individual companies and the market overall to become more economically efficient – a business practice which inevitably hits lower paid workers the worst. As such, they are emblematic of today’s widening economic divide between rich and poor.

Wealthy hedge fund managers fit roughly into two types: “quants”, who make their profits through focusing on complex mathematical models, and “activists”, who pressure companies to alter aspects of their structure, often to the detriment of those businesses long-term, in order to boost its dividends and short-term share price. The current hedge fund initiated battle over the future of ABN Amro bank is an example of activist practices. Super-quant and top-grossing hedge fund manager James Simmons, head of Renaissance Technologies Corporation, ignores NY’s high-society scene and prefers to organize academic conferences on geometry. Conversely, the notoriously aggressive activist and founder of Third Point LLC, Daniel Loeb is renowned as much for his lambasting public letters to company executives as for his savvy as an art collector (he recently sold a Martin Kippenberger painting at a 500 % profit).

This brings us to the reason for including hedge funds in such a glossary of art world terminology: in recent years many hedge fund managers have become high-profile collectors of art, treating it as a new asset class. As hedge fund wealth has grown exponentially in this decade, fund managers’ penchant for post-war “masters” and contemporary art has helped drive the global art market to heights equaled only by the heady 1980s. Artists favored by hedge fund managers have skyrocketed in price; for instance, fund manager adoration has caused the value of Richard Prince’s work to rise five-fold in the past three years. Recent buys such as last year’s purchase by Steve Cohen, founder of SAC Capital, of a Willem de Kooning painting for $137.5m or the $80m paid for Jasper Johns’s “False Start” by Ken Griffin, founder of Citadel, establish new precedents for the value of works. Amy Cappellazzo of Christie’s described Griffin’s Johns purchase, which exceeded the artist’s auction record by almost five times, as having a “permission-giving” quality. In other words, paying large amounts gives other collectors permission to further inflate prices. Apart from major auction purchases, the hedge fund industry also supports a great deal of buying in lesser-known contemporary art. In addition to investment in art by fund manager mega-collectors such as Cohen, who has personally spent more than $600m on artworks, hedge funds specifically for trading art have also sprouted up but so far with apparently limited success.

Beyond the evident increase in economic symbiosis between the art market and finance capital, the way that the “masters of the universe” have adopted such prominent roles in the art world cannot simply be chalked up to wealthy investors finding another market to toy with. According to some art world professionals there is a definite correlation between hedge fund manager’s art-buying sensibilities and the business they are in. The hedge fund manager’s predilection for contemporary art rather than a Rembrandt or a Manet expresses his or her risk-o-philic tastes and constant pursuit of the right kind of profitable edge, useful qualities not only for playing the art market but also for a dealer selling art or, in some cases, an artist producing it. As such, the hedge fund manager’s appearance on the art world stage extends beyond the predilections of a few wealthy individuals, indicating instead a collective gravitation towards a sphere with which they feel a particular affinity. In their work, these titans of global economic markets profit from risk, requiring the ability to turn everything, even loss, into gain and exploit subtle relational differences within a system where positions are transitory and new strategies are constantly adopted to maintain profitability. Perhaps they are drawn to contemporary art and art world practices because they recognize some of these principles and modes of operating in today’s version of aesthetic avant-gardism. How can one diagnose the effects that such trends are having on art production today? While it is easy to point to the many signs of frivolity and excess in the booming art market, or surmise that hedge fund magnate tastes are having an influence on art being made and sold, it might be necessary to wait until the current frenzied bustle of activity quiets (that is, presuming it could sometime soon) in order to get a better look at the deeper impact of these shifts.