YET ANOTHER SNIDELY WHIPLASH FROM WHOM THE DEMOCRATS ARE GOING TO SAVE US

2/24/09

The scandal du jour is that Paradigm Global Advisors, a manager of funds of (hedge) funds run by none other than Hunter and James Biden, son and brother, respectively, of Vice-President Joe “Hardscrabble” Biden, marketed one of its funds of funds exclusively through companies run by the very much in the news Honest Allen Stanford. (See my previous post.) The relationship was so cozy that the $50mm fund was known as the Paradigm Stanford Capital Management Core Alternative Fund. Besides being the exclusive marketer of this extravagantly named piece of financial piffle, Stanford related entities invested $2.7mm, or about 5% of total assets (or at least OF total equity) in the fund. The choice of that mouthful of a moniker pretty much excludes the possibility of the Bidens’ denying knowing that Stanford was involved (unless they want to claim a level of ignorance that would be impressive even by Washington standards), so the Bidens have taken another route around this faux pas: They have pledged to turn the $2.7mm Stanford investment over to the receiver in the SEC’s civil fraud case against Mr. Stanford. The Bidens, of course, make this ostensibly civic minded act sound as if it were voluntary and expect that turning over the money will somehow extricate them from this embarrassing embranglement with the latest headline grabbing Bernie Madoff wannabe.

As usual, the Pontificator finds underlying aspects of the underlying story more interesting than the headline. First, and less titillating, it is interesting to learn that Joe “Hardscrabble” Biden has relatives in the hedge fund business. From his campaign rhetoric, one would think the whole family is either shoveling coal, working in the steel mills, or selling used cars in order to put day old bread on the table. Who would have thought a Biden scion would be a big time hedge fund player? Aren’t such scoundrels the same guys who served as convenient piñatas for the Obama/Biden campaign? Hmm…

That the Bidens are among the financial villains in the Biden view of America, however, is largely forgivable. After all, perhaps the largest aspect of the American dream is to work hard so that one’s kids could have advantages one did not have. Perhaps we take this to ridiculous, sometimes counterproductive, lengths (Guilty as charged at the Quinn household.), but that is what we, as parents, are supposed to do.

What I find really interesting about this story is that young (Perhaps that is an inapt adjective; at 39 years old, the younger Biden is positively ancient in the world of hedge fund managers, but I digress.) Hunter Biden, who was diligently working away as a Washington lobbyist until 2006, got into the hedge fund business that year, according to his former business partner Anthony Lotito, because Papa Joe Biden was concerned about the impact his son’s being a lobbyist would have on his planned 2008 presidential run. Mr. Lotito later sued the Bidens, claiming they still owed him money from the purchase, but that is another story.

So there you have it. Some very smart people would love to start their own hedge funds, or funds of funds, but don’t realize that dream because, despite their smarts, they don’t have the proper connections, like a dad who is a Senator aspiring to be president with friends like Mr. Lotito who are willing to front them the money to get into the business, doubtless for reasons having nothing at all to do with wanting to court the favor of the aspiring financial wunderkind’s father. But a guy like young Hunter Biden is told by his father that he has to get out of the lobbying business for appearance reasons, sits down and wonders “Gee whiz, Dad, what business should I go into? Hey, this hedge fund stuff sounds really awesome. Could I get into that, Dad? Could I?” And, with a handful of Senatorial fairy dust, Paradigm Asset (mis)Management becomes his new toy.

Some hedge funds are run by some very smart people, including some of my readers. (Not that I am claiming a connection or anything.) Some are run by people who simply who know the right people. Most are run by people who haven’t a clue concerning the financial markets, the economy, the way the world works, etc.. But all investors in hedge funds must meet the SEC definition of “sophisticated” investors. If such “sophistication” leads one to invest in a hedge fund, or a fund of funds, simply because it is run by someone’s kid looking for something to do until the heat blows over, one gets what one deserves. (That Paradigm Stanford’s performance hasn’t been all that bad on relative basis (down 9.5% in 2008, up 0.1% this year) detracts little from the above observation.) Bear in mind, though, that the return on an investment in a fund of funds such as any run by Paradigm cannot be measured in mere percentages. “Did I mention, Mr. Vice-President, that I am an investor in Hunter’s fund? That boy of yours is doing one heck of a job, Mr. Vice-President! Now, about that contract…” So I suspect that many of Paradigm’s investors would be happy with their investments even if the measured return were negative 100%, but, as loyal readers know, I am more cynical than most.

One more thought: Hedge funds wield a great deal of influence and sway in the global markets and thus in your financial life. They are often run by people who are as hebetudinous as their connections, familial or otherwise, who hold power over your financial life by virtue of holding high public office. And we wonder why we are in such trouble.