Why the smart ones still live at home

Recent American college graduates are each year off to the "real world," as the transition from holding a part-time college job for booze money turns into a full-time job with alcohol-related purchases taking back seat to making money for rent and things like - gasp - groceries. These new (boring?) spending habits are probably a good thing, as besides not being very healthy drinking can also be tough on the wallet. But if Americans could look past the hurry to enter the "real world," and ditch the negative stigma that is sometimes attached to "living at home," parents could gift to their recent college grads an extremely valuable present at almost little cost to themselves: the gift of free rent.

It is no secret that rent is expensive. Judging from cities where this author has friends and depending on the roommate situation, living in Austin, Texas could put you out $400-$900 a month, Boston, Massachusetts could stick you $600-$1400 a month, while San Francisco and New York can ruin you for well over $1500. This author has the honor of forfeiting over $2500 per month for a very small apartment in Hong Kong, eight months out of college. These aren't swanky digs (nor are they dingy); these are the types of places you'd expect for a recent grad with an entry-level position. Doing a little math, an annual figure of between $6,000 and and $30,000 could go purely to rent, with a slightly higher opportunity cost thanks to monthly or up-front payments. That's a lot of money.

For the recent four-year graduate interested in attending graduate school, living at home is a reasonable option to save some serious cash, especially if is entry-level employer is unlikely to pay for future schooling. The same holds true for recent grads eager to get a leg-up on their personal savings. Looking beyond the annoying but inevitable late-night questions from the parents and the potential dulling of one's social life, what is that abhorrent about living at home? Home can't be that bad; who knows, maybe without the tuition payments the parents went wacky and invested in new hot tub or car. Yet even without these (unlikely) incentives, with the extra cash a recent grad may have enough money to put an additional $10,000 towards long-term savings and take that long trip overseas to visit a good friend in, say, Hong Kong.

This article isn't calling for the abandonment of life after college, or the forfeiture of independence so many college grads stumble into (and seem to enjoy) after living on the lam. But the economic benefits just seem so painfully obvious that, if a recent grad is comfortable with the idea of moving home after college (and if the parents and siblings can tolerate it), why the stigma for those who choose to do so? Ironically those recent grads may very well be the smart ones; indeed, the $30,000 annually this author pays for 500 square feet of personal space in Hong Kong doesn't include the luxury of a refrigerator that magically restocks itself every time mom goes to the grocery store.

Home sweet home. . .after the tuition payments?

Regulation of Hedge Funds

Hedge funds are secretive, private pools of money that use either a specific strategy or strategies to make, theoretically, lots of money. Hedge funds are named as such because they hedge against the market, in an attempt to reduce beta (the correlation of a fund's performance in relation to the market). They make money in confusing ways: some hedge funds trade and purchase derivative contracts, others buy stocks long and short-sell as well (making money when stocks go down, not up), other use exotic futures and other mechanisms to make money. But one thing all hedge funds seek to do is obvious: they all seek to make lots of money. They attempt to do that by exploiting a niche in the market that is under-utilized by others, and when they find that inefficiency hedge-funds happily pile in.

This, by nature, makes the market more secure and less risky. The act of locating inefficiencies makes the actor lots of money, but also makes the market more stable by not letting the inefficiency (disparity between value and price) get too large. This is why leaders should hesitate against blindly regulating hedge funds. Currently it's in vogue to criticize the world of hedge funds: jealousy at some hedge funds' ridiculous profits combined with misunderstanding due to hedge funds' secretive nature creates a flow of misinformation about what exactly hedge funds are and, specifically, the good they do for the market and for average, every-day people.

The truth is, most people can't invest in hedge funds. In the US, laws forbid average individuals with a net-worth of less than multiple-millions of dollars to invest, and most hedge funds themselves have minimum investments of anywhere from $500,000 to $5,000,000, making them far too expensive for the average retail investor. But forget the laws: most average people wouldn't even know where to go to get into a hedge fund, even if there was no law. Marketing materials are privately sent to already established individuals and groups. There are no public announcements of results or invitations for capital.

Instead, extremely wealthy individuals, endowments, not-for-profit institutions, capital-pooling companies and some pension funds are the primary investors in the funds. This may raise some eyebrows, especially in the case of endowments, not-for-profit institutions and pensions funds. But the truth behind these organizations is that they invest in hedge funds to diversify and actually reduce risk; they hedge against the market, protecting investors when big standards like the NYSE and S&P 500 go south for a few years. Because they allocate small amounts to these so called "alternative investments," (the broad category in financial-speak where hedge funds fall) should a hedge fund collapse, as Amaranth Advisors did a year ago, it would create but a ripple in the fund and average investors wouldn't notice a change. News readers probably didn't realize that when the stock market tanked between 2001 and 2003 hedge funds were enjoying three years solidly in the black (as was Warren Buffet's Berkshire Hathaway). As middle-class Americans watched their pensions falter and savings decrease, those who owned investments which had diversified parts of their portfolios to hedge funds didn't feel quite the sting.

Because of their secretive nature, there exists much misinformation about hedge funds. But the truth is hedge funds seek to be independent of the market, unlike the major indices and investment houses, making money by using a strategy not overused in the financial sector. This helps hedge funds make profits even when the market is bearish, because generally the strategies are isolated and not entirely correlated to general market performance. An article posted below notes that in the crash of 1988, the biggest buyers in the market were hedge funds (presumably not allowing the market to crash further). And despite the terrible downturn of 2001-2003, the market returned to life in 2004 with hedge funds leading the charge. Huge disparities between price and value like those in 1929 would be difficult to find today, because savvy hedge-fund managers are seeking to make money from incorrect valuations and would undboutedly short-sell overvalued stock, bring the price back down more gradually than a massive decline when retail sellers decide to rush for the exits.

An excellent article on hedge funds was recently printed in the January/February 2007 edition of Foreign Affairs. It's entitled "Hands Off Hedge Funds," and elucidates much more clearly the points I try to make in this article. It can be found here http://www.foreignaffairs.org/20070101faessay86107/sebastian-mallaby/hands-off-hedge-funds.html

The Disaster of Silence

Iran, America and Israel are blundering down a dangerous path towards disaster in the Middle East. Indeed, Iraq is already a disaster. But a nuclear mishap in the region will make Iraq look like a cake-walk.

Iran and America and Iran and Israel desperately need to open diplomatic communication to avert the marginal possibility, albeit an extremely dangerous one, of a quasi-nuclear mistake via an American or Israeli attack on Iran. The obstacles involved in opening telephone line are already obvious. George W. Bush and Dick Cheney are too pigheaded, as is Mahmoud Ahmadinejad. They fail to see open dialogue as potentially beneficial, and instead would rather shoot from the hip and pray that God makes everything okay. Israel and Iran are equally as troubled. Ahmadinejad himself is a Holocaust denier, and hence both his and Israel's desire to open a Cold War-era hot-line seem limited. This is extremely unfortunate.

The stakes are rising, and they rise higher when states can't correctly interpret signals from others. Although Ahmadinejad himself is extremely blighted, Iran's power does not all rest in his hands. His wishes are not necessarily that of Iran, however unfortunately without communication his wishes may become the de facto future course of Iran's international policy.

It is hard enough for great powers locked in silent battle to refrain from war even with communication; The Economist very accurately makes this point in its Leaders article from last week. Even when the Soviet Union and the United States had communication lines open, nuclear war was barely averted during the Cuban Missile Crisis. Without a private channel to convey wills, wishes and intention via diplomatic speak (or blunt assessments), countries with political capital will engage in an escalating public-relations battle that eventually leaves no choice but for conflict. To show the dismal state of America/Israel and Iranian foreign relations, even America and Kim Jong Il's Hermit Kingdom have done far better at communicating with one another.

Through all this, however, Iran appears to be a rational state actor. This is a good start, but a rational actor may believe its acting in a rational way, only to learn that for lack of accurate information about its foe in hindsight such action was truly irrational. Because Israel seems loathe to accept a nuclear armed Iran, Iran's presumed nuclear weapons ambitions may prove to be just that.