What do the Oscars have in common with hedge funds?
I just noticed the New York Times Dealbook's posting about how hedge funds have gotten involved in film financing. Although a nod from the Academy of Motion Picture Arts and Sciences will be a boost to the egos of these would be movie moguls, I suspect that they are much more interested in profits. It is from this perspective (the monetary one rather than the artistic one) that we see how financial and commercial randomness can prove more fickle than the whims of the Academy's voters.
According to empirical research done by economist Arthur De Vany, financial returns from investing in movies seems to be more uncertain than the prospects of winning an Oscar. This situation is caused by the fact that movie success (and, more often, failure) tends to be consistent with the power law -- specifically, a few movies account for most of the profits of the film industry during any given period. The power law is often associated with 'wild randomness' (a favorite topic of this blog) -- i.e, where the ability to pick winners & losers is hampered by bewildering layers of complex interactions and 'jumpiness' that occur when films are released in the marketplace.
Even if hedge fund managers and traders are disappointed by the results of the 79th Academy Awards or by the byzantine nature of Hollywood financial practices, they can take heart in the Bush administration's recent decision to not regulate the hedge fund industry. If there was an Academy award for acting surprised by this decision, then it would surely go to some lobbyist acting on behalf of the hedge fund industry.