The Alternative Investment Management Association has published a German-language educational paper about the social and economic value provided by the hedge fund industry.
The paper stresses the financial stability benefits that hedge funds provide to financial markets and highlights the fact that hedge funds increasingly are performing an important social role by managing investments for pension funds, university endowments, charitable foundations and other socially-important institutional investors.
It includes AIMA’s estimate that there are 50,000 people employed directly or indirectly by the hedge fund industry in Europe – the first such statistic of its kind produced – and 300,000 worldwide.
Additionally, the paper sets out to debunk a number of popular myths about the industry, such as that the industry is “unregulated”, takes excessive risks and is “secretive”.
AIMA chief executive Andrew Baker says: “When people in Germany and elsewhere across Europe ask what social value is provided by Europe’s hedge fund industry, they are asking a perfectly legitimate question. And our answer to that question is really very simple. Not only is our industry responsible for 50,000 jobs in Europe, but because institutional investors are increasingly investing in hedge funds, our industry plays a major part in protecting the pensions of ordinary European citizens, boosting the resources of universities and charities and cutting the cost of insurance premiums.”
Separately, these same themes were explored in a recent study by The Centre for Hedge Fund Research at Imperial College in London, commissioned by AIMA and KPMG, the international audit, tax and advisory firm.
The headline finding of the Imperial study, entitled “The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy”, was that hedge funds outperformed the traditional asset classes between 1994 and 2011, returning 9.07 per cent on average after fees, compared to 7.18 per cent for global stocks, 6.25 per cent for global bonds and 7.27 per cent for global commodities.
The authors of the study also looked at the academic literature and were able to conclude that hedge funds deliver substantial “real economy” benefits. For example, they cited a survey of European hedge fund and private equity managers that found that those industries contributed EUR9bn in taxes to European Union governments each year.
And the Imperial study also found that not only are hedge funds important liquidity providers in the markets they are active in, they also have a role to play in the efficient allocation of capital, portfolio diversification and financial stability.
Elsewhere, there have been two notable recent studies that have explored additional benefits of hedge funds.
In a paper titled “Hedge funds and Chapter 11”, Wei Jiang of Columbia Business School, Kai Li of University of British Columbia – Sauder School of Business, and Wei Wang of Queen’s School of Business found that the involvement of hedge funds increased the chances that a struggling company would emerge from bankruptcy protection rather than be liquidated. The authors concluded that hedge fund managers were more like “guardian angels” than “vultures”.
A further piece of research by Blerina Bela Reca of the University of Toledo, Richard W. Sias of the University of Arizona and Harry J. Turtle of Washington State University discovered that hedge funds are less prone to “herding” – following each other into and out of the same investments, a practice that helps to destabilise financial markets – than other market participants.
The paper, “Hedge Fund Herding and Crowded Trades: The Apologists’ Evidence”, went on to conclude that hedge funds “make markets more efficient and, as a result, contribute to the efficient allocation of resources in the real economy”.