Wednesday, April 22, 2009

Silicon Valley vs The Gold Coast

The Civil War II has begun but this time it’s not the North versus the South. This Civil War II is about money under management in the financial services industry and it’s the West Coast (Venture Capital & Private Equity) versus the East Coast (Hedge Funds). Let me see if I can paint the picture for you . . .

The bulk of Hedge Fund investment comes from the East coast – principally Connecticut and New York City – which has become the leading location for hedge fund managers. In 1999 there were 500 hedge funds with roughly $500B under management. In 2008 were 12,000 hedge funds with nearly $2.5 Trillion under management. 500% growth!

The bulk of venture capital investment comes from the West coast - principally Silicon Valley. In 1999 there were 1000 VC firms which invested $100 Billion. In 2008 roughly 250 firms invested less than $25 Billion. That is a drop of 75%. Meanwhile Venture Capital accounted for 18% of the U.S. GDP in 2008.

Have you ever asked yourself why VC's or angel investors don't have the ability to sell short (hedge losses) against every private company investment in which 90% go out of business. If VC firms could hedge there would be no job or wealth creation by companies who actually add value to society. VC firms get paid to take risk and are rewarded by 10% of their companies making 10X+ returns. Everyone involved prospers for obvious reasons!

Hedge funds on the other hand profit from short selling and the destruction of capital or stock prices. These funds are primarily responsible for the bulk of the job losses and wealth destruction in the last 10 years and has driven the Stock Market to its' lowest level in 15 years. No one has benefited from this wealth destruction except a few fund billionaire fund managers and investors who I would put in the category of Maddoff even though their practices were legal (today).

Most of the Billions of dollars that have moved away from the Venture Capital sector in the last 10 years has moved across the coast (West to East) into the Hedge Fund investment category and look what it has done. I am very happy that the SEC is considering rules to regulate short selling practices and require funds to start disclosing short positions in companies. Hopefully, this will actually bring money back into the category of Venture Capital and help IPO prospects like Facebook and Twitter.

It is pretty scary when one trader with $12M can manipulate oil futures by $10. I am tired of hearing about traders on TV and want to go back the basics of investing. Futures are for businesses to hedge and not speculation. Stocks are for investing not trading. Some day my wish will come true if Obama stays strong.

West Coast = Venture Capital Funds, Wealth and Job Creation
East Coast = Hedge Funds, Destruction of Wealth and Jobs

1 comment:

  1. Consumer spending is driven by equity market appreciation. Please remind your anti-neighborhood friendly and anti-consumer hedge fund managers that we will see zero job and economic growth until the Dow Jones rises the psychological levels of 10,000 and the S&P 500 rises above 1,000.

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