The New Masters of the Universe

Q. And beyond profit?

A. They can drive markets toward a more stable level when they go toward excess. Hedge funds are set up to be contrarian, and therefore when something overshoots, they come in to drive the price more toward where logic would suggest that it would be. For instance, when a currency price jumps for no good reason, they can sell it short.

Q. What else?

A. And the third thing, which is very, very important, is that we had a financial crisis that demonstrated that too-big-to-fail financial institutions are a huge problem for society because when they do fail the government bails them out. So what we need to do is drive financial risk out of too-big-to-fail institutions into small-enough-to-fail institutions. And hedge funds are small enough to fail, and that’s why when 5,000 went down in the last decade, they didn’t cost taxpayers one cent.

Q. You conclude that governments must encourage hedge funds. How?

A. One way is not to impose symbolic regulations that don’t do much to make anything safer but do increase costs for hedge funds to operate. For example, requiring hedge funds to register with the Securities and Exchange Commission—it sounds good, who could object? And so it’s sort of politically popular to advocate that.

Q. So what’s wrong with doing so?

A. The fact is the SEC doesn’t know what to do with the data. Bernie Madoff was registered with the SEC, and the SEC was warned that Bernie Madoff was cheating, and that didn’t have any effect at all on catching Bernie Madoff. The other thing to do is to be burdensome toward the very big risk-taking investment banks, which I think have proven themselves to be a terrible menace.

Q. How does the new financial regulation legislation affect hedge funds?

A. That’s being debated in conference still. One part of the debate is whether to restrict risk-taking within big banks via the so-called Volcker Rule, which would try to stop banks from doing bets with their own capital, so-called proprietary trading. That is very hard to implement, but I totally support the sentiment because it does drive risk out of big institutions.

Q. If these are such great investments, how can the average investor get a piece of them?

A. The only way that the little guy can get access to hedge fund returns is through pension or retirement funds investing on your behalf, because the securities rules say that you have to be a qualified investor. And that means, legally, you have to have $5 million minimum in investable assets.

Q. Do you have any money invested in hedge funds?

A. I certainly don’t have $5 million in investable assets!

Maryann Haggerty is a freelance writer from Washington, D.C.