ResourceWise

The Good and Bad in Hedge Funds Today: A Manager's View

Hi Eric, thanks for providing outsiders like me a little peek into your esoteric world of high finance. A few questions spring to mind:

1. While hedge funds protect themselves from a ‘run’ by using gates - why do they simultaneously insist that short-selling i.e. selling shares that they do not own with the explicit purpose of driving down share price, is a good practice? Other than creating a ‘run’ on the victim’s shares and in the process making large sums of money for the hedge funds, short-selling seems to serve no useful economic purpose. Or does it? Moreover if hedge funds are such vociferous advocates of free markets why not allow investors to withdraw their money as and when they want it back?

2. Why charge a 2% fee irrespective of whether the investments make money or not? Hedge funds claim to make money in both rising and falling markets, in which case they should put their money where their mouth is and stick to the 20%-of-profits performance fee.

3. Experts seem to suggest that high-leverage by governments, banks and consumers have contributed to the severity of the financial crisis. What has been the contribution of hedge funds to this high-leverage?

Your response to these questions will certainly add to the general awareness of Main Street and the media. Thanks in advance!