The emergence of hedge funds was an accident of history, a gift to wealthy families…


Photograph by Henrique Pinto

From The American Prospect:

If hedge funds go up and down alongside the market, and all but the top performers don’t even beat the market, the rationale for investing in them vanishes. A fiduciary recognizing this would have a duty to investors to step away from hedge funds. That’s already starting: The California Public Employees’ Retirement System, the nation’s largest, pulled out of hedge funds in September 2014, followed by a Dutch health-care workers’ fund the next year.

The quickest way to eliminate the risk to the economy associated with hedge funds is to reclassify them under the 1940 Acts. Their emergence was an accident of history, a gift to wealthy families. But the by-product of that gift has now grown to outsized proportions and shoved itself into practically every aspect of economic life. Putting hedge funds under the 1940 Acts would mandate disclosure, alter fee structures, and eliminate the use of leverage. It would extend the regulatory perimeter in a far sharper way than Hillary Clinton, whose campaign has vowed to rein in “shadow banks” like hedge funds, has so far promised. In effect, putting hedge funds under the wise regulatory structure adopted in 1940 would put them out of business.

Though market forces take a very long time to correct damaging mistakes, sometimes they purge malefactors. For close to a decade, quantitative analysts have built computer programs that mimic hedge fund alpha strategies, generating similar returns through passive rather than active investment, with far lower fees. These have grown to $50 billion in assets, a pittance compared to the hedge fund industry but a 25-fold increase since 2010. Robo-traders come with their own potential abuses and require careful study. But maybe in a few years, outsourced factory workers and hedge fund managers can hold hands in solidarity and demand an end to having their jobs taken away by robots.

“What Good Are Hedge Funds?”, David Dayen, The American Prospect