Step 1: Pension return rates get "set" during boom time highs.
Step 2: Boom times end, the pension fund is grossly under funded, and the manager needs to find ways to get excess return beyond what the typical fixed income and equity products can offer.
Step 3: Pension Managers reach for "alternative investments", hoping for higher returns that can offset lackluster market returns.
Employees shouldn't be forced to but their compensation in a lottery managed by someone else with fraudulent promises of returns.
Here (somewhere near the end) Mr. Blank says that this is what got the silicon valley rolling. When pension funds were allowed to invest, control of the valley switched from the military to the VC funds http://www.youtube.com/watch?v=ZTC_RxWN_xo
Probably another reason is that bonds and index funds do not yield enough to keep the pension funds going; people now live a longer life on average, so they need to pay more on each pension; so its all screwed up.
Everything is screwed up; now that probably that has something to do with the fact that energy prices & commodities are high; there is less energy to go round, so other creative means are found to create 'wealth'; these tricks increasingly have something to do with extracting something from pocket A and transferring it to pocket B.
If you work in the government you might want to avoid your pension being in your own government bonds because you don't want all your eggs in one basket.
If you're an immigrant who plans to retire back to your home country you might want to limit you exposure to currency risk.
It's not just about betting on being better than the market, it's about aligning your investments (pension or otherwise) with your personal situation and objectives.
It's not a zero sum game between you & Goldman. In a growing economy everyone can win by investing.
[1] http://www.isda.org/statistics/recent.html#2010mid
Also see:
http://www.nakedcapitalism.com/2013/03/worldwide-derivatives...
You might as well say that buying milk is a zero sum game, because the milk is either over or under priced. That's just wrong. Financial securities have more to them than just their price.
To put it simpler, a terminated CDS contract does not mean there is a loss of wealth equal to its notional, whereas a stock price going to zero in the equities market literally means you just lost the complete amount you invested.
Not to sound offensive, but I've heard this comparison way to many times and it just doesn't add up in terms of prices - most swaps, for instance, have their fixed leg in the single digits in relation to their notional.
[1] http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a...
[2] http://www.investopedia.com/articles/economics/09/lehman-bro...
Completely false. Wealth is not fixed. There can be two winners, which often happens.
Although, if you take the view that corporations are pillaging America and its taxpayers, then owning stock maybe just the hedge you need. If those corporations' managers aren't pillaging the corporations.
Exactly. Wall street and investment have wonderful effects -- funneling money towards companies that can use it in amazingly productive ways. It provides an incredibly valuable service.
But the flip side is exactly this, that pension funds, ordinary investors, etc. wind up getting screwed.
I, for one, don't realy see the problem with Wall St. in itself, but rather -- who on earth is allowing the managers of pension funds to "gamble" with their money like this? Why should retirement accounts get invested in anything but government bonds and index funds? Employees get duped because they "trust" their company to take care of their pension, or "trust" their financial advisor to give them good advice.
At heart, I think it boils down to a fundamental misguided notion, prevalent in America at least, that investment is good, that you can grow your money, that you can outwit the stock market -- when the reality is, that for 99% of people, investment is just playing the lottery, and over the long run, Goldman etc. is going to win, because they're smarter than you. Just like, in the long run, the lottery always wins.