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What's the social utility of hedge funds? Their business model is to draw in investors who are willing to pay extremely high fees in exchange for the hope of b

What's the social utility of hedge funds? Their business model is to draw in investors who are willing to pay extremely high fees in exchange for the hope of beating the market. In practice, hedge funds underperform the market, so their investors are paying fees for nothing. The only winners are the hedge fund managers. Enriching people for providing negative value to their customers isn't socially useful. Along similar lines, the crowning achievement of the synthetic asset quants was the creation of a mountain of toxic three-card-monte mortgage debt that exploded in 2008, bringing down the global financial system, crashing the world economy, impoverishing hundreds of millions of people, and creating the political environment that lead to both Trump and Brexit. Blowing up the world certainly isn't socially useful. I don't see any downside to reducing the FIRE sector's share of GDP back to what it was in 1960. The economy worked for the median person then; it doesn't work for the median person now, and the amount of wealth the FIRE sector sucks out of the economy to pay for these kinds of games has a great deal to do with that.

hnracer 6y ago
Hedge funds underperform the index because hedge funds exist. I'm going to circle back to what I originally said. The alternative reality of zero hedge funds is not a reality that can possibly exist. The reason it can't exist is because the lack of hedge funds will create edge in the market, which will incentivize the creation of hedge funds (or other trading companies). So, given that zero hedge funds is not possible, then what is the best thing for society? The answer is that we want the best and most efficient hedge funds to extract all available edge with the minimum possible resource input. Once this happens, we achieve perfect competition and new talent no longer had an incentive to perform this activity and can go and do more useful things for society. This is the value add of hedge funds in our society. If we have one good hedge fund that extracts all edge, then the thousands of other would-be investors and traders can now go off and be scientists or engineers.

hnracer 6y ago

Hedge funds underperform the index because hedge funds exist. I'm going to circle back to what I originally said. The alternative reality of zero hedge funds is not a reality that can possibly exist. The reason it can't exist is because the lack of hedge funds will create edge in the market, which will incentivize the creation of hedge funds (or other trading companies). So, given that zero hedge funds is not possible, then what is the best thing for society? The answer is that we want the best and most efficient hedge funds to extract all available edge with the minimum possible resource input. Once this happens, we achieve perfect competition and new talent no longer had an incentive to perform this activity and can go and do more useful things for society. This is the value add of hedge funds in our society. If we have one good hedge fund that extracts all edge, then the thousands of other would-be investors and traders can now go off and be scientists or engineers.