Those hedge funds


There seems to be a certain amount of glee behind this statement:

Emmanuel Roman, of GLG Partners, said 25pc-30pc of the world's 8,000 hedge funds would disappear "in a Darwinian process", either going bust or deciding meagre profits are not worth their efforts.

"This will go down in the history books as one of the greatest fiascos of banking in 100 years,"

But I'm not really sure why. Hedge funds haven't caused any of the current problems, indeed, many of them, by going short, have reduced the size of the bubble and thus the subsequent crash.

"There need to be some scapegoats, and the regulators are going to go hunt people.

Now that is certainly true, and hedge funds most certainly are going to be one of the prime suspects to be those scapegoats. But there's no good reason why they should be.

Hedge funds are simply investment vehicles, ones that by restricting themselves to only taking investments from sohpisticated investors are able to do things that mutual funds and unit trusts cannot because of regulation. They can go short, invest in different classes, commodities, bonds, shares, as they wish.

It's also true that they have grown massively in recent years (even decades) as new opportunities tend to. One or more people find a way to make excess returns, above the usual risk adjusted level, and then others spot that. So they move their own capital into that very field. This is exactly what we want to happen, capital moving towards its most productive use, just as we want the same to happen with any other resource. Now certainly markets often overshoot, so it's entirely possible that there's too much capital now chasing those excess the point that there are no excess returns, even that returns in the field as a whole are below the normal risk adjusted rate. OK, "shrug", some people will continue to make profits, others perhaps losses , some will leave the market and the risk adjusted return will level out at around and about that which is normal in the rest of the economy.

But via innovation (in this case financial) we've seen that high profits attract capital until there's enough capital there so that profits aren't high. Which, as I say, is exactly what we want to happen, just as we do with bananas, electricty and lawyers.

Why should the people in such a process become scapegoats...other than the thought that our rulers might not understand such simple points about how markets allocate resources?