We read the IHT news just to find out what our fellow countrymen are thinking about. If we want a laugh, we turn to the editorial pages.

But today’s financial news practically caused a ruptured spleen. This is a headline from International Herald Tribune:

“Bringing hedge fund-style investments to the masses”.

Ha...ha...ha...oh stop it, please...our stomach muscles can’t take much more of this.

About the only financial edge the lumpeninvestoriat has enjoyed recently, is that it has not been able to get into hedge funds. But along comes an entrepreneur who plans to eliminate that saving grace; Mr. Christian Baha proposes to do for the middle classes’ financial needs, roughly what subprime lenders did for their housing needs.

“Merrill pioneered the retailing of stocks,” says the CEO of Superfund; “Fidelity did the same thing with mutual funds. One day Superfund will be a household name.”

We don’t doubt it. Superfund could easily become as popular and well known as New Century Financial (OTC:NEWC). And Christian Baha’s name, too, could go right up there in the great financial headlines, along with Charles Ponzi.

“If hedge funds are good for the rich, they are good for everyone,” says Baha, carefully covering himself. For, of course, if hedge funds were good for the rich, we wouldn’t be laughing so hard. What hedge funds are really good for is making hedge fund managers rich. Sooner or later, nearly everyone else takes a bath.

Investors are almost sure to lose money. Because even if the odds of making a profit in the typical fund - over the long run -were better than 50/50, they couldn’t be very much over 50/50. So, when the hedge fund manager takes 2% of the capital and 20% of the gains - and none of the losses - the investor is likely to end up (be it suddenly or gradually) with less money than he started with.

In the present Age of Money Madness, the ‘less’ they are going to end up with could be a spectacular loss.

Here’s the CEO of Black Rock (SEA:BLR), who says, “lenders to highly indebted companies are making the same mistake that subprime lenders made.” Well, what mistake did subprime lenders make? They lent money to people who couldn’t pay it back. And who’s making that mistake now?

Hedge funds.

In the old days, before funds came along, it was the banks that arranged financing for companies in need of it. But one innovation leads to another. First came sophisticated machine guns in World War I and then came the tanks. From the Somme to the Blitzkrieg, the history of warfare is one innovation after another. And in finance, after subprime mortgage lending blasted the ranks of America’s middle and lower middle classes...along comes the Superfund to mop up the survivors.

When it comes to supplying funds for dodgy corporate deals, hedge funds rush in where banks fear to tread. And here we turn to Rob Peebles to tell us how...and why, using an example from the Wall Street Journal, July 25,
2006:

“First, Burger King paid the private equity folks $22.4 million in ‘professional fees,’ apparently for shepherding the company from the public wilderness into the loving arms of private equity owners. Then, after three years of restructuring and other voodoo, and three months before releasing Burger King back to the public, Burger King paid the investors a $367 million dividend...

“Burger King borrowed the money for the dividend, the sort of thing that apparently is possible at the late stage of a credit bubble.

“Finally, as a parting gift of sorts, Burger King paid the investors $30 million to terminate their agreement, because after all, there is only such improvement an operating company can take.

“All in [all], according to the Wall Street Journal, the private equity investors squeezed $448 million in dividends and fees out of The King before the company went public again...

“New York Times columnist Floyd Norris recently put a number on the private equity dividend mania, and that number - the amount of money companies borrowed to pay dividends to their owners - was $26.9 billion - in the first quarter of this year. At that rate, RFP this year will easily surpass last year’s $56 billion, a figure that towers over the less than $20 billion borrowed for dividends as recently as 2003.

“The beauty of RFP, as Mr. Norris points out, is that the private equity investors can make money even if the company itself goes under, or has to layoff scads of employees. But who would loan money to a company that borrows money at one end and pays it to its owners out the other?”

We elaborate. Who would be so stupid as to lend to borrowers who use the money merely to impair the lenders’ collateral?

Mr. Peebles answers the question as we do - hedge funds, of course.

And why? Because they can earn high fees currently, while pushing the potential losses onto their investors eventually.

But let’s return to Mr. Baha. In fairness to him, the Superfund does no such thing. Instead, his two main funds “invest in more than 100 markets, including oil, coffee and currency and index futures,” according to the IHT report, using “a computer program that is maintained by a team of 35 people.”

“Baha said the program exploits trends in commodity prices that go consistently up or down, using models of past price movements. Once a trend is identified, Superfund’s ‘black box’ issues a buy or a sell order.

“‘The charts never lie,’ said Baha.”

Ba...ha ha ha ha....

Oh, stop it...you’re killing us...Wall Street would never try to pull the wool over our eyes - would they?

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.