[aikiai]

He is suggesting that top executive and trader pay be based on the long term performance of the fund. In particular, their own money should be invested in everything they do, and likely also for a number of years after they leave.

[wmorein]

One interesting thing to me is that even if you do this (correlate compensation with longer term results) a lot of the same problems still happen. Take, for example, the first big hedge fund blowup: Long Term Capital. Shortly before they blew up, they kicked most of the third party money out of the fund and even levered up their own individual positions (see the book "When Genius Failed").

I'm not saying that misalignment of incentives doesn't play a significant role in a lot of what we are seeing now, but never underestimate hubris.

[three14]

We can't solve hubris, but perhaps we can highlight it to investors.

Funds that too hard to value or are highly leveraged should switch from regulation by the SEC to regulation by state gambling commissions. It would be tricky to find the right cutoff, though, but if an investor would have to travel to a Native American reservation to buy credit default swaps, they might start thinking about whether they really understand what they're investing in.

[eru]

How about the following regulation:

No restrictions on what funds can do, no government bailouts, but full disclosure so that clients may impose their own restrictions.

[Retric]

A lot of strange things happen when the players have diffrent amounts of information.

EX: Would you bet 1 billion dollars with slightly less than even odds?

Well if you don't have a billion dollars then your real risk could be much lower vs. your potential gain. The real question is who would trust you to actually have a billion dollars? That's the real sucker, unless he also lacks a billion dollars.

[russell]

If they hadn't paid out that dividend, LTCM would have had enough in reserves to survive, but no one seems to have learned from that, least of all Alan Greenspan.