This just in: The hedge fund industry is here to stay. That’s right folks, you read it here first. The evil that men and women do will continue as the wannabe do-gooders fail to rein in the last bastions of pure capitalism. The death of the hedge fund industry, my friends, has been highly overrated.
The reason that hedge funds are here to stay, regardless of what new regulations Congress and the powers-that-be throw at the industry, is that Wall Street, Main Street and everyone in between need hedge funds to make sure the markets move, capitalism thrives and Ma and Pa Kettle have money to buy G.I. Joe with the kung fu grip and Malibu Barbie for their kids this Christmas. And while most of the rational people in society understand this, there are still quite a few skeptics who blame hedge funds for the credit crisis, the rampant unemployment and the Yankees winning the World Series.
Hedge funds aren’t the reason why the world economy is a mess. They didn’t cause the credit markets to freeze last year. It’s not the hedge fund industry’s fault that Lehman Brothers went bankrupt or Bear Stearns was sold for $10 a share or that Merrill Lynch was forced down the throat of Bank of America. The blame for these failings, and the rest of the financial mess, lies with the government’s inability to govern, to deal with special interests and to understand how Wall Street works.
To paraphrase Jack Nicholson in the movie, A Few Good Men, most of us can’t handle the truth. Deep down in places that we don’t talk about at parties, we want hedge funds to prevail; we need hedge funds to exist. Why, you ask? Without hedge funds, the markets would be illiquid.
Do you honestly think JP Morgan Chase CEO Jamie Dimon or Citigroup CEO Vikram Pandit have any appetite for risk, let alone the ability to execute on it? Even if they did, Uncle Ben and Uncle Tim won’t allow them to take it. It would be too risky.
But taking risks is what makes markets move, so somebody has to do it. Goldman Sachs can’t take all the risks by itself. After all, someone else has to be on the other side of the trade. That, my dear friends, is why we need hedge funds. We need them to be on the other side of the trade.
Without hedge funds, we would be facing a liquidity crisis unlike any seen since the Great Depression. The Federal Reserve knows it, the Treasury knows it and, heck, even the big banks know it. The only ones who don’t seem to know it are the people inside the Capitol. That too will change in time. Right now, the government is banging the drum for regulation, registration and other things that they believe will tame the wild beasts. But this too shall pass because hedge funds are here to stay.