In Defense of Hedge Funds

I prefer to write my own blog posts, but the following op-ed piece from the London Daily Telegraph is so compelling that I want to reprint it, in its entirety.  Hat tip to Market Seer.

It was written by hedge fund manager, Hugh Hendry.

We Hedge Fund Managers are on Your Side

You don't know me; we've never met. But I fear you are being
encouraged to dislike me. Let me explain: I'm a speculator. I manage a
hedge fund. Apparently I profit from your misery. Accordingly, our
political leaders are keen to see the back of me.

Only yesterday,
Germany and France were calling for the "fastest possible" adoption of
new rules to put an end to financial speculation. But before you write
me off I ask that you listen to my side of the story.

First, and much like the bogeyman of folklore, the size and
significance of the hedge-fund industry is vastly over-stated. The best
estimate is that people like me control just 2.5 per cent of total
global financial assets under management. The ability to move prices and
markets resides more with the managers of pension funds, unit trusts
and our banking contemporaries; fortunately, for them, they are on much
better terms with our political masters.

Second, and much to my
regret, I have to correct another misconception. I am not guaranteed
success; far from it. I have no certainty or monopoly on making money;
that's the nature of risk taking, there is no free lunch. And believe
me, I am subject to the harshest possible critic: the market.

my political adversaries I can't spin this out. If I am wrong in my
deliberations, I have to record a loss immediately. So it should come as
no surprise that I give great consideration to what I do.

what about this short-selling business and the allegation that hedge
funds seek to profit from the misery of others; are we simply a scourge
on society?

I believe not. Let me explain. In short selling,
investors borrow shares and sell them, hoping that the price will fall
and they can buy the shares later at a lower price, replace them and
thereby turn a profit.

Hedge funds are not seeking to dictate
economic affairs. Rather we are preoccupied by price. A market-based
economy like ours requires a pricing mechanism to allocate resources and
ensure that we all prosper. Get it wrong and we endure the calamity of
the technology bubble and the sleazy debacle of the American mortgage

It's not that hedge fund managers are bitter and seek to
wreak havoc. It's just that we believe that recurring and periodic
recessions reveal the economy's winners and losers. And through our
endeavours, hedge funds attempt to discover the identity and
inadequacies of the poor businesses. During hard times, such businesses
typically go bust, allowing us to make an investment profit by betting
on that eventuality, and ensuring that successful and prudently managed
businesses prosper.

Or rather that was how it was supposed to
work. But our political leaders have gone to considerable cost to avert
this normal business cycle.

Fearing that the huge scale of
reckless bets within the banking system threatened another depression,
our politicians have used public funds to bail out the economy's losers.
And in doing so they run the danger of creating a plutocracy: a society
ruled by the wealthy. Consider that fact that in Latvia school teachers
have had to take a 35 per cent pay cut so that the Swedish banks who
funded the real-estate bubble are repaid their imprudent mortgages.

need to stop this socialistic of risk taking: heads I win, tails you
lose. Consider the American government's enormous bail out of the failed
insurer, AIG. According to the world's largest bond fund manager, Bill
Gross, it is perfectly acceptable for the taxpayer to subsidize his
returns. As he explained it to the investment magazine Barrons:
"All I'm saying is the government would lose almost $50 billion if it
decides AIG no longer is worth supporting. It is a game of chicken. You
either call the government's bluff or you don't."

I would
recommend a different course of action. It is the same one recommended
in 1930 by then US Treasury Secretary Andrew Mellon. I would call the
bankers' bluff and seek to purge the rottenness out of the system. All
of us will work harder, prices will adjust, and enterprising people will
flourish. Of course, this is a minority view. Instead, those in power
would rather use the subterfuge of inflation to hide the enormous public

The politicians' problem is that free and independent
capital markets tend to be anti-inflationary. As we have seen, attempts
at quantitative easing immediately depress the value of existing
government bonds in addition to the value of sterling. And then you have
the problem presented by my little industry. But we are intelligent,
well-funded and willing to vociferously challenge public decisions. Most
importantly, we are on your side.



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4 Responses to In Defense of Hedge Funds

  1. Anthony V 03/18/2010 at 5:45 AM #

    Thanks for posting this Mark,if only this logic was part of our childrens curriculum either in schools or at home we would all be better off as a culture on many levels. I spend a lot of time trying to educate my children on the realities of a free market.

  2. Mark Wolfinger 03/18/2010 at 7:37 AM #

    Sadly, our education system is a failure on so many levels.
    Financial education is either useless to the students or non-existent. Politicians want to set the curriculum. Teachers are being laid off everywhere due to a money shortage. That guarantees an even worse future.
    So sad. So unnecessary.

  3. henry tzuo 03/18/2010 at 9:36 AM #

    Hi mark:
    Thanks so much for all of your thoughts — I am really interested in reading the “lesson of a lifetime” —Is it available in PDF format??? If yes, I really want to buy it. or it is in other formats??? Can buy and read it without a kindle??
    thanks in advance.:-)

  4. Mark Wolfinger 03/18/2010 at 10:06 AM #

    It’s in .pdf format.
    No Kindle required.
    It’s finished, but before releasing it, I want to do a final edit with minor rewrites.
    It should be a few more days. If you order now, I’ll send it when complete. Or you can wait until it’s finished and ‘officially’ released.
    The discount ends March 29.
    Regards and thanks for the kind words.