Business Day South Africa – When people are asked about the culprits behind the financial crisis, many reply “the hedge funds”. This is curious because, unlike the banks, the hedge funds have not caused much damage to the world economy. None has gone spectacularly bust. None has had to be bailed out by the taxpayer. When they lose money, they simply close down. That is painful for their investors, but they chose to invest and take the risk. It is more than 10 years since there was a big crisis in this multitrillion-dollar industry: Long-Term Capital Management, rescued by the Fed in 1998.
Yet the hedge funds have a problem in public perception. They are seen to be aggressive, dangerous, secretive, powerful, unregulated and other bad things. Many of these accusations are true. The whole point of hedge funds is to take challenging positions in the market, to gear up mightily through borrowing, to keep quiet about what they are doing, and to make enormous profits.