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Are Hedge Funds and Private Equity Firms Next?

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2 Responses

  1. Ken Rhodes says:

    The word “hedge” has a specific meaning in economics. In that usage, a hedge is a good thing for the person buying it (i.e., limiting unaffordable downside risk) and a good thing for the person selling it (accepting an affordable downside risk in return for an upside opportunity.) The affordability issue is the reason there have long been restrictions on certain types of speculation, limiting them to “sophisticated investors.”

    More recently, though, the subversion of the term “hedge” has become total. A “hedge fund” has nothing to do with hedging. It is merely a vehicle by which speculators can do whatever they want without annoying and inconvenient restrictions designed to protect the market.

    If we [more accurately] called them “unrestricted speculative enterprises” then perhaps the reaction against regulating them might be different.

  2. Michelle Harner says:

    Ken:

    Your comment is so timely; I was just reading an article about farmers turning to derivatives to hedge risks posed to their crops by weather, etc. And you are right, in economics, the term “hedge” generally is a positive term that corresponds to value preservation.

    With respect to “hedge funds,” my understanding is that the term originated with private funds that hedged market risk with short-selling strategies. Nevertheless, regardless of its origin, you also are right that the term now engenders very negative images. Perhaps a more accurate name would help people understand the distinction between “hedging” and “hedge funds.” I also think our tendency to generalize about terms and investment funds contributes to the problem.

    Thanks for the comment.

    Michelle.