Hedge Funds – The Root of All Evil?

“We cannot forget how in 1997-98 American hedge funds destroyed the economies of poor countries by manipulating their national currencies.” – Dr. Mahathir Bin Mohamad, (former Prime Minister of Malaysia, during the emerging market crisis).

The Hedge Fund industry has come under major scrutiny in the past few years. Blamed for stock market crashes, manipulating the markets and threatened with a ban on short selling, if a scapegoat was needed, they were ‘shortly’ targeted (!). Chargers of high fees and notoriously opaque – people naturally fear the unknown, and an expensive unknown even more so. Nevertheless, as Richard Wilson pointed out in his blog – back in 2007 the head of the Financial Services Authority (FSA) said that:

hedge funds were not the catalysts or drivers of (that) summer’s events.”

Hedge funds trading in the financial markets can increase liquidity and aid price formation. Jed Emerson wrote a great piece at the end of last year taking he argument away from a debate between “good” and “evil” and instead concluding:

“fundamental fund of hedge fund investment strategies, when managed appropriately, may represent an emerging though as yet not realised opportunity for investors to pursue both full,  commercial  rate  returns  and  affirm  relevant  aspects  of  Sustainable  investment practice.”

Although I question the assertion the fund of hedge funds industry is emerging – since in some cases it seems to be retracting, I agree they offer an opportunity for returns and the claim of affirming sustainable investment practice balances the opposition’s argument.

What seems to be a rarely discussed topic is the value the industry provides the wider economy, outside the financial markets. Below I highlight some impressive information, sourced from a great article by Open Europe….

BOTTOM LINE: Job and tax contributions should not be under-estimated.

Benefits of PE / HF Industry to EU Economy

  • Contributed ~ 9 billion (£7.9 billion) in tax revenues in 2008 – could fund the EU’s overseas aid budget for twelve years, or the regional budget for Poland,
  • Directly employ 40,000 people in the EU – 18,000 of whom are employed in the UK (before taking those involved in real estate funds or dependent on the industry)

Benefits to UK Economy

  • €6.1 / £5.3 billion tax income raised in the UK alone
  • Enough to pay for over 200,000 nurses or 165,000 teachers.
  • Tax revenues generated over 2 years could pay for the entire 2012 London Olympics.
  • If the revenues were lost, would take 20% increase in av. council tax bill to make up

SK

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One comment

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