Thoughts on Hedge Fund industry painted as villain?

From the following article: Elizabeth Warren says the stock market has become a 'playground for the billionaires'. She's calling for a wealth tax to fix it.

How valid are the comments regarding the "system" deliberately and systemically fucking over the general population? See below for one of the top comments from the thread. 

There was never a point at which "the stock market" as we know it wasn't a playground for the super-wealthy. There has never been a point at which derivatives weren't used to corner markets, and there has never been a point at which speculation didn't create asset bubbles that imperiled working people.

People who work on Wall Street, or wish they did, always argue that what they do is essential to the economy--that options trading supplies necessary liquidity, for example. They use confusing jargon that they don't even understand to obscure the reality that there is no more proof of this than there is for trickle-down economics. It is a fucking dogma.

On the other hand, there is proof that the maniacal trade of complex financial instruments by a wealthy and irresponsible few can--and has, and will--destabilize the economy and lead to catastrophe for the rest of us. Prior to the Great Recession, the insurance market for mortgage-backed securities was 20X the size of the housing market itself. And when the bubble burst, $5 trillion disappeared from regular people's balance sheets--pensions, retirement funds, home values. All because of a few thousand people working on Wall Street who believed (correctly, as it turns out) that they would never have the pay personally for the risks they were taking.

We need a fundamental shift in the way we think about risk management in our economy, because right now, the incentives are rotten to the core. A wealth tax might be a good idea for other reasons, and I favor it, but it will not address the basic problems with our financial markets.

Comments (8)

  • Research Analyst in HF - Other
Jan 30, 2021 - 9:51pm

The HF industry is being painted, rightly, as a villain, but for the wrong reasons. The current arguments scapegoat the HF industry and take the heat off other culpable actors, such as market makers, banks, and the existing government regulations. 

Most Helpful
Feb 3, 2021 - 1:39pm

It is rather ironic that you are making such comments in one of the richest, most prosperous countries in the history of the world. Remember, humankind came from poverty, and so the question is not why does poverty exist, but instead, why have some people and societies generated wealth at all? 

The stock market is not some kind of roulette wheel. Yes, day to day it can and does feel like a casino, and the abstract, complex nature of markets (versus say surgery) makes it hard to internalize and understand its benefits. However, speculation and efficient capital allocation/price signals are huge drivers of growth--remember that capital is one of the world's most valuable and scarce resources.

To make this more concrete, think about which companies have the greatest growth potential, as measured by equity prices and valuations (subtracting out assets like cash).  In this list you will find companies like Tesla (revolutionizing cars, battery technology, AI), Zoom (could you imagine the pandemic without its seamless video calling software?), Moderna (revolutionizing biotech with an mRNA platform that was ignored by academia and the NIH), and Crispr Therapeutics (a company that is trying to develop gene-editing based therapies). This is where capital is flowing. 

Now of course, there are bubbles and other market inefficiencies (which are exceptionally painful when combined with efficiency-sapping govt regulation and subsidies). No one claims that markets are perfect, and trend-following, mimetic behavior often leads to the madness of crowds. These dynamics are in many ways intrinsic to the human condition, and are found well beyond financial markets. The passionate frenzy that marked the Russian Revolution or the swift Bush-era invasion of Iraq (or the recent push for wealth taxes) aren't all that different from the overspeculation during the Tech Bubble of the late 1990s. 

If you are interested in learning more about the role of prices and allocation of risks, I would suggest reading about commodities markets. The underlying goods are concrete and easy to understand, like cheese and aluminum. Many tangible participants in the "real" economy, like farmers and suppliers, need to buy and sell these goods. Perhaps surprisingly, the prices of these contracts are significantly more volatile than equities. Thus, one can see more clearly why having a market to efficiently price these goods, with enough liquidity to enable participants to hedge and manage the massive risks, benefits a lot of people. 

Hope this helps. 



Feb 6, 2021 - 1:40pm

Whether or not a stock is overvalued is in the eye of the beholder. I agree that some names like NKLA are extraordinarily bubbly but my point was that capital is flowing to innovative companies. I also stated that these companies are the ones with the greatest market-implied growth potential, which is true. 

I'm not an investor in either CRSP or MRNA (would in fact short CRSP if I weren't afraid of crazy ARK inflows). It is very plausible that the growth expectations are too rosy, and if so, I hope that folks like you are taking short positions to make the price more efficient. Just frustrating to hear criticisms that Wall Street is a "casino" and a "playground for rich people" when the biggest beneficiaries of current allocations are companies like Crispr Therapeutics/Moderna, which are both undoubtedly pursuing very novel therapies. 

Feb 15, 2021 - 6:39pm

Just to be clear I wasn't making the comment in my initial post... I was just looking for insights from a forum that centers around Finance and that has a lot more per capita expertise on these subjects than Reddit does. I am a young guy just trying to figure it all out. I like to pull my information from various sources and hear both sides. That was the point of this post, not to say that I agree with what the dude on Reddit said. 

Thanks for your response. This helps contextualize the positive benefit that Hedge Funds / AMs / etc., and markets more broadly, provide to society.

Feb 6, 2021 - 4:05pm
I used to do Asia-Pacific PE (kind of like FoF). Now I do something else but happy to try and answer questions on that stuff.
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