Sabela Capital Markets was quoted in this Good With Money article about hedge funds, “Can Hedge Funds Ever Be Ethical?”.
I don’t believe that investors need to separate their ethics from investing. Even sustainability investing does not mean aligning beliefs at the expense of returns. Indeed, sustainable firms can be ethical, efficient, and even more profitable. Unfortunately, the capital markets don’t distinguish among the motivations of the participants. The markets are simply information-processing machines, quickly incorporating all available news and expectations. When hedge funds make bets in the short term, they can still provide liquidity to other participants (even to those of us who think investing should be for the long haul, rather than for short-term speculation) and, by pushing their expectations into the markets, hedge funds may even contribute to the overall fairness of security prices.
The more important question may be why investors still get caught up in the hype, ignoring the evidence and opting for speculation gimmicks. Making bets in the short-term hasn’t been a good idea. Rather, minimizing costs, diversification, and discipline are much more important for your odds of investment success (the opposite of speculation). Capital markets have rewarded long term investors. And, there are so many indictments against hedge funds’ performance. See “Reputation of Hedge Funds is Hacked Back Hard: Research finds the investment vehicles underperform simple benchmarks after fees”; “Confessions of a Jaded Hedge Fund Manager”; “Another Problem With Hedge Funds, They Don’t Even Hedge”; and “How A Toronto fund manager became and indexing advocate.”
Ethics may not help nudge investors away from hedge funds. For many, the phrase ‘hedge fund’ “still invokes Hollywood images of rich white men in pinstripes sipping champagne in million-dollar penthouses as they bank profits from another day’s ruthless stock market trading.” Reality for the investors who make bets with hedge funds has strikingly been different. Just this week, another rock star hedge fund manager is mulling shutting down his fund, “John Paulson mulls shutting down his hedge fund.”
Don’t fall for speculation gimmicks. Anyone can get lucky once or twice. To really hedge against the next crisis, your best bet is to hold a broadly diversified portfolio of low management fee mutual funds.