Since the 1970s, financialization has turned much of the U.S. economy from being based on real productivity into a gigantic craps game. The casino-like nature of the modern equities markets, coupled with the fact that in order to avoid steep depreciation of money people are forced to play these games, has meant that the risk associated simply with saving money has skyrocketed.
But the systemic problems associated with financialization are mild when compared to the serious problems that investors can face if they are not extremely careful about what funds they choose.
Shervin Pishevar says many funds are outright scams
Shervin Pishevar is one of the foremost financial experts in the world of tech finance. He runs Investment company, one of the most respected venture capital firms in the world of technology. Shervin Pishevar also regularly tweets to his more than 100,000 followers on Twitter.
In a recent spate of tweets, Shervin Pishevar discussed the nature of compensation plans for fund management. He said that much financial innovation is actually just the creation of more risk. But this is disguised as being somehow good for the individual investor or the markets. The conceit is that these instruments increase liquidity, provide more secure or higher returns or provide a means of diversification. In fact, the overall effect of many financial innovations, like credit default swaps, is simply to increase the volatility of the funds under management.
Shervin Pishevar says that this increase in volatility benefits managers because they are often compensated in a way that allows them to participate in the upside while not assuming any downside risk. Pishevar says that this amounts to a classical principal-agent scam where one party maximized their profits by simply creating as much risk as possible, thereby maximizing their payoffs when they get lucky and double the funds’ money.
But Shervin Pishevar warns that investors should not be fooled by these arrangements. He says that there is virtually no evidence that hedge funds or other actively managed funds are able to outperform simple index funds. He says that the only active investing method that is shown to work is value investing.