Never Fear, Hedge Fund Man Is Here

For some time now, those who are suspicious or disdainful of capitalism and wealth have been on a mad hunt for evidence of something called "systematic risk" that can be pinned on the proliferation of hedge funds and alternative investment vehicles, which are always ominously described as "secretive pools of money for the wealthy." The basic argument contends that the presence of so many, and so many large, hedge funds adds undue risk to the markets and hurts the average investor. That argument always precedes a call to regulate or place restrictions on hedge funds.

As some readers might recall, I have contended that the proliferation of hedge funds makes our financial markets less risky and ultimately helps the average investor (here and here). I have noted a couple of examples where these large pools of capital sweep in to buy busted positions thus mitigating the risk that localized distress will turn into a wider crisis. The proliferation of hedge funds has given us big, aggressive, and liquid players willing to inject order and rationality just as markets are tending to disorder as they are overcome by fear. To put a face on this phenomenon look no further than today WSJ which profiles the firm and the man who could be the poster child for this beneficial role that hedge funds play in today's capital markets.