Chapter 5

Hedge funds: for and against

Hedge funds attract some pretty strong opinions. A friend of the author, someone who has spent an entire career in investment management, described them as “a menace; they’re not interested in the business or in the long term at all”. Trade unionists and left-wing politicians express their concern in much more graphic terms.

The case against hedge funds comes in three distinct varieties. The first is political, and is closely linked with the general case against free-market liberalism. At its heart, hedge fund critics simply dislike the ability of managers to make so much money and worry that this is made at the expense of ordinary people. In their eyes, hedge funds are simply the latest example of rapacious capitalists, from a long line that includes multinational corporations, investment bankers and private equity groups. Resentment is particularly high in continental Europe, where hostile takeovers and active shareholders are recent innovations. The credit crunch gave such critics the chance to take their revenge on the industry, regardless of its role in the crisis. As one fund manager says:

When a fight breaks out in a bar, you don’t hit the bloke who started it. You hit the nearest bloke you don’t like.

Similar arguments were made against the corporate raiders in the 1980s and were outlined by Will Hutton in his book The State We’re In.1 Hedge funds destroy rather than create; they are interested in short-term profits and not the long-term ...

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