Hedge funds said to make a “social contribution”

04 Mar 2009

Critics of hedge fund compensation often argue that hedge fund managers – and by extension, asset managers in general – do not provide a “social good”.  Highly compensated traditional entrepreneurs, they say, make life better for people instead of just shuffling the chairs.

In fairness, it’s not like Obama is encouraging American teens to give back to society by volunteering at their local hedge fund.  No one is encouraging people to “make a difference” by launching a hedge fund and there is no “Hedge Corps” (although there are now many examples of a hedge corpse).  But Edhec’s Arjuna Sittampalam argued earlier this week that hedge funds actually do contribute a social good.  Wrote Sittampalam:

“Amidst all the criticism, there are many aspects in which hedge funds deserve praise. Their strongly pioneering role in venturing into new investment areas, and in the process bringing them to the attention of other investors, is one major aspect. In other ways too, they make a strong social contribution…” (our emphasis)

By “social contribution”, he’s not just talking about hosting society parties in Greenwich either.  Sittampalam is talking about things like Reinsurance, Pulp derivatives, Carbon dioxide emissions credits, Global real estate, including derivatives, Weather derivatives, Credit cards, Higher-risk lending, Socially responsible investments, Film-making and film finance, Catastrophe bonds, Freight derivatives and shipping, Lawsuit funding, Directors’ dealings, Song copyrights and Trade finance.

AIMA CEO Andrew Baker would probably concur with this assessment that hedge funds do provide social good.  As HedgeWeek recently reported:

“The hedge fund industry in Europe and elsewhere has been hit very hard, like other sectors, by the current crisis, but has responded in an orderly way and has not triggered any systemic risks. Hedge funds did not cause the present market turmoil, and because they have an essential role in providing liquidity to the markets, will be important in assisting any eventual recovery.

“Baker notes that with a significant proportion of its assets under management coming from institutional investors, the hedge fund industry ‘plays a key role in preserving savings and pensions across Europe and also generates tens of thousands of jobs across the continent. It is part of the solution, not part of the problem.” (our emphasis)

This message seems to be getting through to regulators.  Hedge Funds Review reports on a recent meeting of EU regulators:

“Although there is strong political push in the EU for action, industry representatives from the EU and the US pointed out there is a great deal of misinformation around hedge funds and the risk they pose to the international financial system.

Many participants stressed that private investment vehicles are part of the solution to get economies back to normal and money flowing. This message, however, has clearly not reached the wider public.” (our emphasis)

AIMA announced today that (thanks largely to the stickiness of their investments) over 50% of hedge fund industry assets now come from institutions.  The social dimension of this finding was not lost on AIMA’s chairman who said:

“These figures demonstrate that the hedge fund industry plays an extremely important role globally for the institutions that look after everyone’s pensions and savings…” (our emphasis)

A hedge fund manager may not win the Nobel Peace Prize anytime soon.  But as the industry tries to emerge from under its negative image, we are likely to hear a lot more about the social value and economic externalities of hedge funds.

Addendum: We wondered if one could now add Madoff legal claims to that list of social contributions provided by hedge funds.  Thomson reported that Madoff investors may soon be able to trade their legal claims on a secondary market.  Needless to say, an enterprising investor may soon start a hedge fund trading residual Madoff stakes.

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