Progress report
An assessment of hedge fund YTD performance in the face of renewed fears for a potential eurozone crash Read More
16/03/2011
Comment: Andrew Baker
Since the financial crisis, we at Aima have sought to highlight the social and ‘real economy’ benefits of hedge funds to policymakers and the media.
There are several strands to our argument. We have stressed, for example, how the diversity of the hedge fund industry is useful both for regulators and investors. Investors benefit of course since the industry offers them an enormous choice of investment strategy and the potential for customised portfolios. But, as leading academics have argued, the diversity of the industry also helps to ensure that risk is more safely dispersed among thousands of firms that do not pose a systemic risk themselves and could be described as being “small enough to fail”.
We have focused on tangible concepts like tax and jobs. We have calculated, for instance, that 300,000 professionals work in the industry globally either at hedge fund manager firms or their service providers. And we have emphasised that as well as increasing the tax-take of governments, often by many billions of dollars each year, no hedge fund has ever been bailed out with taxpayers’ money.
We have made clear the financial stability benefits created by hedge fund activity. We have stressed, for example, that it is often hedge funds who are the first to identify signs of impending trouble in financial markets, recalling that hedge funds were among those who raised questions about Enron before its 2001 fall and expressed doubts about the dot-com boom in the late 1990s and the real estate bubble of more recent history.
We have explained how, in the future, hedge funds will augment financial stability analysis through the reporting of systemically relevant data to national regulators. And we have stressed how hedge funds may help to dampen the worst effects of market crises when they act in a counter-cyclical way.
We have also drawn attention to the social implications of changes to the profile of hedge fund investors. An ever-growing majority of assets under management are sourced from pension funds, university endowments, charities, insurers and other institutional investors, which means that when hedge funds are successful it is socially valuable investments that are being enhanced. Indeed ordinary members of the public, from firefighters and teachers with public pensions to students in higher education, are increasingly benefiting from hedge fund activity.
Of course, we have not forgotten the industry’s more traditional defences. Hedge fund activity is helpful in terms of increasing market efficiency, adding liquidity and facilitating price discovery. Admittedly these remain abstract concepts to the uninitiated, yet we have sought to explain that they too are socially desirable since they help to reduce the cost of capital and ensure that capital is allocated to well-managed and productive companies – those most likely to generate jobs and tax revenues.
The industry should be more confident about demonstrating its social value and usefulness. The incentive for making this case is a powerful one. Sound and effective regulation – which is what we all want – will flow from a dialogue with policymakers based on mutual respect and understanding.
As the global hedge fund body, Aima will continue to stress these benefits to our key audiences.
Andrew Baker is the chief executive officer of Aima, the Alternative Investment Management Association
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60 seconds with... Kenneth Turchin
CAN YOU DESCRIBE YOUR CURRENT ROLE?
I have worked in public accounting and hedge funds and in the past eight years have been selling middle- and back-office services to the alternate investment industry. My role is to build relationships with clients, teach them about SS&C’s products and services, and ensure seamless transactions every time the firm launches a new fund.
IF YOU WERE DOWN TO YOUR LAST £1,000, HOW WOULD YOU INVEST IT?
I would buy THREE shares in Apple and hope for a repeat 383% return in the next five years.
WHAT WOULD YOU DO IF YOU WERE IN PRESIDENT OBAMA’S SHOES?
That’s one pair of size 12 shoes I do not want to be in!
WHO WOULD PLAY YOU IF THEY MADE A MOVIE ABOUT YOUR FIRM?
Kevin Bacon. He is a versatile actor and the centre of the entertainment universe. I am in sales. Everyone in the industry would be linked to me in six steps or less. My client list would be ridiculous.
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