Daily Beast columnist and law professor Frank Partnoy argues that not only have some hedge fund managers been profiting from smartly timed trades, but they may have actually provided a little bit of stability in an otherwise volatile market.
The Daily Beast: Savvy hedge fund managers are the heroes of the financial crisis—and regulators are smart enough to realise it…
[Last week’s Congressional hearings] sought to praise these men, not to bury them, for the valuable role their funds have played in the markets. They have reduced risks and stabilised prices by buying low and selling high. They have been an early warning signal by uncovering bad news. They have generated value for investors by pressuring entrenched managers to focus more on shareholders. In a recent Journal of Finance study I co-authored with professors from Columbia and Duke business schools and Vanderbilt law school, we found that hedge fund activists generated large positive returns to investors for precisely these reasons.
Legislators might envy a billion-dollar payday, but they see that these men make money from incentive fees only if their clients make money. Moreover, unlike the Wall Street banks that collapsed this year, these hedge fund managers didn’t try to make money through massively leveraged bets…
[W]e can excuse a few toady moments in exchange for some confidence that during its financial manhunt Congress can tell friends from enemies. Not all hedge funds are equal, and some are as much to blame as the bankers, traders, and credit rating agency executives who mislabeled complex investments, hid risks, and nearly destroyed our financial system.
But the five billionaires who testified on Thursday are the good guys. Four of them even agreed to new regulations requiring increased disclosure, especially of derivatives. During these times of crisis, it is heartening that our legislators seem to know where to paint the bulls-eyes. Or at least where not to.
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