Hedge Funds Attempt to Justify Existense

By on September 22, 2010

Matthew Lynn, writing a Bloomberg opinion column, comments on the ways in which hedge funds defend their usefulness to society.

First, stop going on about “liquidity” all the time. It just isn’t plausible that holding stocks for milliseconds — which is all that high-frequency trading amounts to — makes the market work better in any way. There is, of course, a disadvantage in highly illiquid markets. You may well be reluctant to buy shares in a small Ukrainian minerals company, no matter how great its prospects look, because you don’t know if you can sell them again. But Vodafone Group Plc? Nestle SA? Citigroup Inc.?
Likewise, short-selling. It’s perfectly legitimate in certain circumstances to short-sell a share. Occasionally, it will make the market a bit more efficient if there are more buyers than sellers. But again, none of the major markets is hard to trade. Nor are any of the big stocks really mispriced — and, even if they were, it’s not much of a problem. If your sole contribution to humanity is that you help the share prices of large banks collapse over a morning rather than a whole day, it isn’t much of a justification for your existence.

SMA Comment: Hedge funds really don’t need to defend their existence (although it is debatable given the dismal performance of the average fund). As long as they can find enough gullible wealthy individuals to pay their exorbitant fees, why should they care if they are a net negative to society as long as they are operating within the law?

Source: Bloomberg

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