What value do hedge funds add to the society?
Genuinely curious what value do hedge funds add to the world? I understand you can argue that private equity/venture capital add value to the society by helping a company realize its potential or growth although the majority actually failed. So what value do hedge funds add?
bump
if I had to guess I’d say something along the lines of price discovery and efficient/accurate valuations of financial assets
Ok, hot take but what the heck do PE firms do? They literally just invest in companies and make a return so they only get money. They take the meat and keep skinning it from companies and then leave it for dead by IPOing it or selling it. Ugh, not an OnlyFans account is all.
That's right. I think nowadays you see a lot of companies going into bankruptcy because of the huge debt load taken when they were LBOed, but don't some PE/VC firms actually help companies grow and contribute to the society instead of merely reaping a profit? An example would be Softbank's investment in Alibaba etc?
I will try answering for the ‘bottom/worst cases’ or the worst of these transactions.
basically they allow companies to grow and expand in ways they couldn’t otherwise, and become much more efficient. this is super complicated because it’s a case by case situation every time, but the majority of LBOs aren’t toys r us / whatever’s bankrupt in the news. the MFs have a lot of money and they are essentially running a hedge fund strategy that looks for consistently returning 15% IRR opposes to actually doing anything risk taking for higher returns. I think that could be a problem (but never having worked at a MF) where strategies could be in line with what you mention.
Adds value to society by buying out earlier investors who took risks getting the company to where it is (which is how the company got there in the first place, without this incentive system even pre-LBO companies wouldn’t exist as much as you would think) including entrepreneurial management. As much as companies may be better pre LBO from the outside they got there with some incentive of cashing out too.
but at the end of the day, a PE Company will be the ‘best’ at financial engineering in the same way a consulting Company is best at ‘consulting’- the capitalist incentive prizes the outcome and the appearance of value add but there are all sorts of intermediary reasons certain decisions couldn’t be made in the first place (backfiring PR wise or management losing credibility with workers, etc. in the worst cases) and where PE companies find all sorts of ways to boost EBITDA margins that the management won’t know or implement (being financially unaware the smaller the company, to other reasons as the company is larger).
PE companies will do what they do best- boosting EBITDA in a 5-7 year period. By definition an LBO exit is a sort of financial engineering that boosts returns through messing with leverage. At the end though, if/when the debt is paid off, the company should be offering a much more robust product and value to society that’s scalable without leaving money on the table. I think it’s interesting because on some level, people question whether the portco is delivering 2-3x the value as pre LBO (the target CoC or multiple enterprise value at end depending on debt paid off).
I think the answer is that even in the worst situations companies have their EV 2-3x and that parallels the company improving but the PE company taking most of the benefit. Maybe the company is 1.2x better and the PE company eats most of the returns. But they’re the owners, and the shareholders through them. What’s the point in being an owner of capital if you are not getting sufficient returns? The difference is that PE companies have an end goal of returns/improved ebitda, etc. which are nominal values that don’t exactly represent value add to society. They aren’t taking risks to improve the company necessarily as they are to simply getting the return. The EASIEST way to get those returns is maximize growth/ value add to society, but in order to maximize returns and compensate for risk there are all sorts of intermediary things that happen and as owners and risk takers what do you expect? There’s no other alternative really. But PE companies have strategies all over the place and 90%+ of the time the portco gets a value add because management changes and becomes better, better decisions are made agnostically, etc.
I’m not sure exactly what I’m arguing or if I’m really arguing for anything. I’m more saying it’s too complicated to say, and whether or not PE companies benefit non-capital holders is a weird question. Ideally they do, and generally they do, but maybe they mess around too much and ruin a business. But they have to pitch to lenders who take the collateral and investors on the business potential and seeing that plan through is what ultimately is rewarding for everyone all through the system.
I actually think it provides some value. Now hear me out because this may sound insane but the public markets are actually one of the most common ways to make money for the average person as I'm sure they are many people who have taken an investment strategy and applied it in order to increase their money.
HF's allow the general public to be aware of their quarterly reports, investment picks and performance against the S&P which in turn can greatly inspire someone who may not be exposed to the finance industry to get into investing in a legal and ethical way.
Just imagine if Buffet became the richest man in the world without anyone knowing what or how he did it. That level of secrecy would cause significant social and economic issues, however because everyone knows he is an investor society can then look towards hoping to replicate some of his success by investing in the public markets with their own capital which in turn makes society richer, which makes them consume more and the economy can function.
even then it’s regular everyday people who ‘own’ most of the companies through the huge AM firms anyway. they’re paying for what they get essentially
both HF and PE serve to cut the fat and inefficiency of the markets and economy lol. HFs engage in price discovery/fair value and add liquidity to the public markets. PE shops takeover underperforming and bloated companies, and gut them through to realize value from what was previously inefficiency.
we’re doing god’s work remember that
basically providing the guiding market hand of efficiency that normal people can’t. there could be something said about aligning incentives on things that aren’t necessarily value add, but at the end of the day someone needs to buy the company from HFPE for them to realize a return and it’s typically other similarly sized strategic buyers / financial sponsors / HF’s. I can’t really think of anything better tho, while it is regrettable shitty things happen to the other stakeholders in the business no companies are growing broke from their abundance of innovation
$$ money $$
Every single company that has been fraudulent has been discovered and exposed by a hedge fund. Obviously, you have to take into account that hedge funds have an economical incentive for their investment to perform well and that creates a conflict of interest.. However, the fact is not the SEC nor journalists are the firsts to discover fraud. It's always a hedge fund that brings fraud to light, and causes people/organizations to take a closer look at a company.
Another point is that many of the large investors in these funds are pensions so if they do well, millions of average working-class people benefit. Given the pressures being felt by many of the largest pension funds to meet future obligations, if hedge funds and private equity funds help them reach their obligations, I would definitely say that's a positive on society.
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