In the spring of my freshman year, Greg Johnson '77 gave a talk about his life as a film producer in Hollywood. He showed his film "Smoke" (1995) and shared some interesting production stories before taking questions. After a few job-related inquiries, someone jokingly asked, "Why do movies suck today?" Some laughed, some were taken aback, but Johnson took the question very seriously.

Although he said he didn't mean to offend, he answered that movies have degraded because of people like us: Bowdoin students in the financial sector. In the last few years, hedge funds have invested more and more in film production. They made a bunch of spreadsheets and found two types of movies that almost always make a return: $100 million-plus superhero movies and sub-$15 million teen sex comedies or slashers. It's a numbers game: they don't care what's onscreen so long as we're paying to be in front of it.

The answer turned my stomach. His explanation was so elegant, so simple. In 2007, the average studio film cost a staggering $65.8 million, double that to include marketing, and the money has to come from somewhere. That's where the profit-driven investors come in.

The trend dates back to the dot com bust of the early 2000s when studios were desperate for any type of funding that might offset their potential risk on large tent-pole pictures. Similarly affected by the economic downturn, finance houses scrambled for a recession-proof place to invest their money and turned to the film industry. Even in a terrible economy, people still go to the movies.

The conservative macroeconomic nature of hedge funds and the high risk, high yield nature of film returns may not seem the ideal matchup. Fund managers compensate by investing enormous sums of money across a studio's entire production schedule. A single film may be a big gamble, but group a dozen together and you'll likely make a profit.

In early 2003, Warner Bros. accepted over $500 million from Legendary Pictures (a production company conglomerate of financiers ABRY Partners, Columbia Capital, and Falcon Investment Advisors, among several others) for a slate of 25 upcoming movies. The hedge fund managers involved with Warner Bros. may not have been rewriting dialogue, but they were able to exercise significant creative control to protect their investment.

Some—like "Batman Begins" (2005) and "Superman Returns "(2006)—fared very well commercially. Others—like "The Ant Bully" (2006) and "Lady in the Water" (2006)—did not. But overall, the return was nearly 30 percent.

Today, hedge fund money is the lifeblood of the film industry; it has effectively restructured how films make the transition from development to production. Paramount, MGM, Lionsgate, Fox, and Sony all have deep Wall Street connections. Many funds like Paramount's Stark Investments have a checklist before a film is allowed to enter production: films may be required to have a certain number of stars, genre appeal, sequel potential, overseas marketability, and popularity of source material, among other criteria.

Media consultant firm SNL Kagan even has a profitability algorithm called a KPI. When a movie is normalized by all of these factors, its profit potential may be maximized, but the product itself is easily overlooked. This makes for many derivative and generic films at the multiplex.

Cut to this past weekend when found-footage thriller "Paranormal Activity 3" pulled in a whopping $54 million for the best October opening and best horror film opening of all-time. In the able hands of "Catfish" (2010) directors Ariel Schulman and Henry Joost, the Paramount picture cost a paltry $5 million to make, but will easily go north of $150 million in worldwide grosses. It is the movie executive and hedge fund manager's favorite type of film.

Even more surprising is how Paranormal torpedoed Summit Entertainment's star-studded $75 million debacle, "The Three Musketeers 3D" (2011), which grossed $8.7 million for a pathetic fourth-place finish last weekend.

Despite the recent spate of cheap (by Hollywood standards) horror flops this year—"Apollo 18," "Fright Night," "Shark Night 3D," "Final Destination 5"—that have all dithered at the box office, producing those clunkers hardly causes a financial dent because just one success like "Paranormal" will more than cover the cost of the duds.

If "Paranormal" had failed miserably, it might have signaled the end of the franchise, but the cheap scares would have kept on coming. Hollywood has always searched for the next "Blair Witch Project" (1999), "Napoleon Dynamite" (2004), or even "Clerks" (1994) that can turn millions from a meager budget. Hedge funds have turned the search into a science.

After the weight of Greg Johnson's explanation sunk in, someone asked how this recent development in the industry affects his work as a producer. He described how a character drama like "Smoke" would have much more difficulty getting made today, how it's getting rarer and rarer for a film's content to be valued over its marketability, and how he expects the trend to get worse before it gets better.

On Monday, Paramount President of Domestic Theater Distribution Don Harris said of "Paranormal"'s success, "I can't imagine that we wouldn't make a number four."

I can't either.