Growing role of hedge funds in the economy

Abstract

The objective of this article is to document the profound and growing role of hedge funds in the economy. It is accomplished through identification and analysis of numerous activities normally associated with hedge funds that have become an integral part of capital market activities. Examples include the phenomenal growth of exchange traded funds (ETFs) and mutual funds that follow hedge fund strategies. The number of mutual funds that hedge, short sell and use leverage is increasing. Hedge funds are key suppliers of liquidity in the stock and US Treasury bond markets. Commercial banks are investing the mortgages they originate as opposed to selling them in secondary markets. Hedge funds make commercial loans and modify residential mortgages. They underwrite reinsurance policies. Hedge funds significantly influence corporate governance by playing key roles in acquisitions and corporate reorganizations. NASDAQ OMX recently began listing the alpha index options intended to allow investors to trade options on the relative performance of a stock or ETF as compared with SPY. Hedge funds invest in sovereign debt, negotiate good terms and reap the rewards. They launch philanthropic organizations. The legal and competitive landscape is evolving in such a manner that fosters hedge funds investment strategies for many years to come.