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Comment by nl | Hacker News Reader

This seems a pretty unconventional use of the word derivatives.

Unless I'm missing something, the story here is that people are pooling money to setup a company to invest in Facebook. That's just normal investing - exactly like investing in a VC fund that invested in Facebook.

I suppose technically they are investing in a Facebook derivative, because they get returns from the investment company rather than Facebook stock directly. But people don't say a Vangaurd find is a Walmart derivative just because it invests in Walmart, nor do they say investing in the Accel Funx X (which funded Facebook) is investing in a Facebook derivative.

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I have also never seen the word derivatives used in this context. Isn't "derivatives" usually used to describe options, futures, warrants, etc?

Derivatives in that sense are used to add some leverage on a bet and are known for their high risk, compared to the risk in directly owning their underlying equity securities. They aren't directly related to the underlying (same idea in calculus: y = f(x) ≠ dy/dx). I don't see how this adds additional risk in addition to the risk associated directly with owning Facebook stock.

While this technically is a derivative (underlying is Facebook stock), I think using the term "Facebook derivative" is a bit misleading.

Note that this guy's blog seems to be mostly about ragging on the financial industry and how it's going to kill us all. Using scary words like 'derivatives' is much more effective for that sort of fear-mongering than using 'investment fund' which was much less tainted by the economic woes of the last few years.

Umm, for one thing, the description of the instruments as "derivatives" is not due to Kedrosky, but to Avi Levy, the author of the Bloomberg article he was quoting. You did see that he was quoting another article, didn't you?

Also, it's not a "scare word" in this context at all. It's a fairly neutral term, and an accurate enough description of what these investment firms are doing (even if they chose to use other words to market these instruments).

He still was all too happy to adopt the term, and not make any reservations on its use, wasn't he?

Of course it's technically a neutral term. But in this context, it is a scare word. When you write a blog that seems to be a pop topic blog for a wide audience, in today's world 'derivative' is a scare word. The average news paper reader hadn't heard about 'derivatives' before 2008, and since then he heard about it every week, usually in the context of how much money they have cost some firm, how much money they have cost the tax payer, how much money they have cost pension funds, or how much money they have made for those greedy bankers in Wall Street, London, Frankfurt or wherever - or a combination thereof.

So yes, 'derivative' is a term with negative connotations to the wider public. It is one of the words that are now associated with irresponsible risk and money out of thin air. It's irrational to blame the use on the instrument, but hey, it's an irrational world out there.

Paul Kedorsky is actually a well respected blogger who has just signed a partnership deal with Bloomberg: http://inside.bloomberg.com/blog/2010/11/paul-kedrosky-joins...

I didn't know him, I just did a quick scan of his blog, at least the articles on finance, which seem to be limited to posts in which he can find something snarky to say about Wall Street or macro economic policy. Plus the blog is titled 'Infectious greed', of course.

But yes he does seem to have a Master's and Doctorate in finance, and he's worked in the financial industry; it looks like he's not a complete quack. But his blog is not a balanced, objective study of economics, either - it's more infotainment than academic discourse (at least that's my impression after a 5 minute visit of it).

Yea, the category of derivatives is actually quite broad. Options, futures, forwards, etc. are all derivatives - in that they derive their value indirectly from the underlying assets, but they're traded so broadly that the specific names make more since.

I believe these are derivative because they aren't buying the stock directly, but purchasing rights to them.

This is done to Fortune 500 CEOs option/stock pools to sell off their rights to purchase others' rights to their stock for the sake of diversification without selling publicly and causing a scare - to the board or investors.

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