Dr Arjuna Sittampalam, Research Associate
EDHEC Risk and Asset Management Research Centre
March 2009
Hedge funds are being vilified for poor performance and are threatened with heavy regulation. Amidst all this negative comment, it is salutary to remember the hedge funds’ pioneering and dynamic contribution to the investment management industry, as well as their substantial positive social contribution. It will be a pity if the heavy hand of regulation destroys the benefits they bring to asset management, the wider economy and society.
The hedge fund industry is undergoing a traumatic phase, with many funds suffering from poor performance and redemptions, and large numbers are expected to close. According to some extreme estimates, 50-80% of the hedge funds are expected to disappear this year, with assets under management shrinking from US$2 trillion-plus at the peak, to a small rump of just US$300 billion.
Much of the attention is focused on disappointing performance, whereby hedge funds are accused of not delivering what they promised.
There are, however, some highly positive features of hedge funds that tend to be overlooked in this general analysis of a likely cull. Amidst all the criticism, there are many aspects in which hedge funds deserve praise. Their strongly pioneering role in venturing into new investment areas, and in the process bringing them to the attention of other investors, is one major aspect. In other ways, they make a strong social contribution, as argued below.
