Working at a Hedge FundArticle / Produced by TOW Project
A hedge fund is a mutual fund that invests in specialized financial instruments not usually available to individual savers. Hedge funds are often lightly regulated, highly-leveraged, and can invest in a wider variety of financial instruments, and charge a higher management fee than ordinary mutual funds. Hedge funds have been in the news recently because a few hedge fund managers have earned huge management fees, a few hedge fund managers have been accused of insider trading, and when stock prices sharply decline hedge funds tend to be blamed.
Hedge funds can be understood with the help of our finance framework. Hedge funds can love savers by providing savings opportunity with a higher return for the risk and a lower correlation with economic cycles. Many hedge funds invest in derivatives and as such provide risk reducing opportunities for the parties on the borrowers’ side of the derivative contracts, in addition to the investors’. In this way the hedge fund can show love to firms that are looking to reduce risk. Hedge funds can be viewed as wholesalers in the securities market who are in the business of buying oversupplied product and selling undersupplied product, and thus both attempting to make a profit and helping to make the market work better. In this way they are serving society by helping security prices to more accurately reflect intrinsic value.
The complexity of any particular hedge fund’s investments can make it hard to describe exactly how they bring justice and love. If all the positions are voluntary, market-rate exchanges, it can be assumed that each party expects to benefit. But, the complexity may also mask hidden subsidies, power imbalances, information asymmetries, tax dodges, or other infringements of the biblical foundations of finance. Some hedge funds, because of their particular investment strategy, can be quite clear about how they are loving savers and borrowers, whereas other hedge funds will have a harder time doing so. Finance professionals and investors would do well to research diligently whether a particular hedge fund—or any investment—results in good stewardship, justice, and love, or whether it primarily serves to make as much money as possible for the hedge fund managers at the expense of other parties.