In the past few years some have been overly enthusiastic in attacking hedge funds. While there is certainly a case to be made that the speculative investing hedge funds engage in represents nothing more than a relentless hunt for opportunities to reap economic rents from market inefficiencies, in our view critics of hedge funds are wilfully ignoring the many admirable characteristics of hedge funds.
There are at least 3:
- Unlike the soulless mega firms that dominate financial services, many hedge funds are small firms run by entrepreneurial investors who think of little more than generating outsized returns for their investors.
- The admirable alignment of incentives between the vast majority of hedge fund managers and their investors stands in sharp contrast to the compensation of many of the key decision makers in the wider financial services ecosystem, which seems to have been designed to ensure rich payouts regardless of performance.
- The vast majority of hedge funds have no backstop, failure in the market equals death; exactly as it should be.
The economy needs more, not less of what hedge funds (in their pure, return-oriented form) represent. Critics of these nimble investment vehicles and the financial entrepreneurs who manage them are showcasing their ignorance.