Do hedge funds serve any purpose?

Question

rich get richer
poor get poorer
a few do work for hedge funds
any reason they should not be illegal or heavily taxed since they serve no purpose

Answer 1

Hedge funds do serve a useful purpose, one that indirectly benefits nearly everyone.

Hedge funds are not so different from long funds (like mutual funds, etc.) with the primary difference being how they make a profit. Long funds try to make a profit from the increase in stock prices by buying low and selling high. Thus if stock prices go up, they make money and if they go down they don't.

Hedge funds take both long and short positions and try to make money on the volatility. If the market is volatile they make money and if the markets are stable they don't.

The benefit this provides is that when the markets start to go down, long investors pull their money out of the market. however, as that money comes out, the hedge funds come in providing a counter balance to the flow of funds. After the markets have stabilized the long investors come back. Without the counterbalancing effect of the hedge funds, the stock market would become significantly more volatile.

Hedge funds reduce volatility in the market, increasing returns to long investors, including the portfolios of individual investors and their retirement funds. In this way they provide a service that benefits nearly everyone.

Answer 2

Are they really that much different from Mutual Funds?

For the life of me, I can't understand why anyone would pay a complete stranger to underperform the market and always stay in the the market through ups and downs without any protection, when I can do the same thing myself by buying ETF's.

At least hedge funds are allowed to hedge and protect themselves to a certain degree. They are allowed to short the market or just get out of the market. Some are allowed to use leverage. These seem like useful "purposes" to me, especially if these meet your investing criteria. And the way hedge funds are growing, it seems other people tend to agree.

You seem to be somewhat of a cynic with allegations they should be illegal? What an outrageous claim. What's your problem?

Answer 3

The majority of hedge funds do not really make dramatic amounts of money. Most are just that, a hedge against things going wrong.

The process of options, (puts and calls) is just insurance for most large investors. They are able to lock in profits and limit losses. There is of course many more complicated ways to use a hedge but thats the simplified version. A farmer (explanation above) wants to sell his grain. He wants to lock in a profitable price now. He enters into a contract where in he will sell his fixed quanty of grain at a fixed price. In order for that to happen, he needs a buyer. He may not be able to find a buy today who just happens to be in the market for grain which has not been harvested yet. He needs speculators who are willing to take the risk in exchange for a futur profit to bring liquidity to the market. Now he has "sold" his grain. What if his crop fails? One good hail storm and its over. He has an obligation to deliver a fixed amount of grain for a fixed price on a fixed date. Only trouble is he has no grain any more.

Solution? He takes an option on some one elses grain. He may even get the same quantity and price and delevery date. If he gets his crop in and all is well, then end of story. If he has a crop falure, he can exercise his option and take the grain from his option and meet his contract requirments, so his losses are limited or nutralized.

And you want to lay a heavy tax the guy who grows your groceries because??????? You want to lay a heavy tax on the guy who keeps the market fluid because???????? The problem with capitalism is that we all play a part. And we all are effected. If the union will only work for a zillion dollars an hour and you support the union, great. But when you pick up your groceries and it cost you a zillion dollars, don't complain.

When the people who play a role in the markets, do so, they do it for a profit. There is nothing wrong with that.

Its odd that you say rich get richer and poor get poorer. It is in the hedging of markets the the little guy can go toe to toe with the big guys. Once upon a time a dock worker in california started to play this very game as a small fish in a big pond. He is now considerd the guru of wall street. His name is Warren Buffet. Yeah a forklift driver in california is now the guru of wall street. These people provide a real service. They don't do it for free any more than you would be willing to work for free. If you place a heavy tax on them, who do you think really pays it? In the end when you buy your groceries, (your the end user) you will. It will be right there in the cost of everything you use, touch, eat, and wear. Without them, goods and services would not flow very smooth.

Warren Buffet did it. I started as a factory worker in Utah. I did it. Retired at 45 because I understood how it worked and then went out and worked it. I did it on my itty bitty paycheck. A few dollars a month. Now my house is paid for. So is my truck. Not because of a hedge fund but because I did what they do all by my self. So can you. So you have a chance to make a lot of money but would rather see it become illegal or taxed at an even higher rate? I don't understand you. I must be missing some valualbe bit of information. I'm sorry you don't see the purpose served by hedge funds. Just because you don't see it, doesn't mean its not there. It just means you don't see it.

Answer 4

I haven't really studied up on hedge funds but to hedge means to bet against to limit risk. For example, a farmer might by options in the grain they are about to sell. If the price goes up they lose money on the options but make it on their grain. If the price goes down the loose money on the grain but make it on the option. I might have that backwards. Anyway I'd guess a hedge fund was originally designed for the same purpose. The people who are supposed to invest in them already have a stake in some risky business. If you don't have a stake and you invest, you are probably exposing yourself to a lot of risk.

My guess is that people invested in these funds without a prior stake because they saw someone make a lot of money doing it. After they invested they lost their money, and that's why you are upset. Any time there is high risk, there is potential for high reward.

I'd say that any kind of fund is designed to provide the less wealthy with investment diversity that only the wealthy had before. This is the opposite of the rich get richer thing you were talking about.

Answer 5

you truly do not realize hedge earnings any respect in case you imagine that the sheer length of the fund guarantees you'll win. Many hedge funds lose funds. that's not elementary to communicate a topic with you once you look to don't have any understand-how of ways hedge funds function. examine up about them, and once you realize them extra perfect, come again right here and carry forth.

Answer 6

There are SO many items you can invest in, if you don`t think hedge funds "serve any purpose" DO NOT INVEST IN THEM.
To me, a hedge fund will invest in what ever is working at the moment and what ever is achiveing the highest yield(s).

Answer 7

Hedge funds objective is to make partners wealthier by investing in the best opportunities available regardless of asset class, industry, geographical location, leverage, or having to go short.

Answer 8

purpose of a hedge fund is to make better than average market retruns(make money)

This has nothing to do with the income inequality

as for legality issue I see no harm in a group of individuals pooling their money for investment

Answer 9

Hi, i suggest a great site with plenty of Issues related to your Investing and everything around it. it also provide clear and accurate answer to many common questions.

I am sure that you can get your answers in this website.

http://investing.sitesled.com/

Good Luck and Best Wishes!