Hedge Funds Educating College Students

[caption id="attachment_4600" align="alignleft" width="250" caption="Image Courtesy Of Robert Pizzo"][/caption]

Take a look at this article from The Wall Street Journal that discusses how hedge funds are educating college students. Matt Wirz of The Wall Street Journal discusses more in his article Generation Jobless: What Hedge Funds Can Teach College Students:

Ask hedge fund manager Daniel Ades about the future for recent college graduates and he likes to draw a picture, a very ugly picture. He sketches out a bell curve mapping the historical default rate on student loans – then he draws another curve much higher to show the likely default rate for the Class of 2011.

Mr. Ades has become an expert in the $242 billion market for bonds backed by bundles of student loans, delivering consistently strong returns by trading hundreds of millions of dollars worth of the debt over the past four years. "We know all these deals inside out and we know their default rates," he said.

But when it comes to the loans banks made to students who graduated in 2010 and 2011, the 31-year-old investor is steering well clear, "because we can't quantify the risk," he said.

Investors like Mr. Ades have a unique view on the future for America's job-seekers. Their investments depend on accurately predicting young people's ability to pay their loans, which means they obsess about everything from employment rates in different professions to the long-term earning potential of young graduates.

Historically, investors have assumed 25% to 30% of student loans bundled into their bonds will default but they are baking in 30% to 40% default rates for loans owed by the current crop of graduates, said Chris Haid, a director in asset backed trading at Barclays Capital. Even those assumptions are a best guess and defaults could ultimately go higher if unemployment rises, Mr. Haid said.

This analysis translates into some surprising insights for students and policy makers. For example, in the current economy, it may make more sense to enter a technical college than to go to law school.

Not all lessons from the bond market are so counterintuitive. The most important, in fact, is a slight twist on a maxim most students know from childhood: stay in school, just not too long.

Read more at The Wall Street Journal