Hedge Funds and the Financial Market: Written Testimony Submitted to the United States House Committee on Oversight and Government Reform

Abstract

This document is a revised version of the written testimony submitted to the U.S. House Committee on Oversight and Government Reform in connection to the hearing held on November 13, 2008 on Hedge Funds and the Financial Crisis. Based upon my research on the activities of hedge funds, there are three important findings I would like to share with the Committee. First, hedge funds did not cause the financial crisis and are in fact helping to mitigate its damage and save taxpayers money. This may seem surprising, but in fact hedge funds have historically made markets more stable and helped their investors conserve wealth in times of economic stress. Second, hedge funds' short-selling activities have helped draw attention to the poor management and investment decisions of financial companies in recent years. Indeed, when hedge funds short-sell the stocks of unhealthy companies, they help to divert capital from companies that are fundamentally unstable. This not only prevents stock market bubbles from becoming much worse, but it helps to ensure that companies that make sound decisions are rewarded and are able to provide stable jobs for their employees. Finally, existing laws and regulations should be strictly enforced against hedge funds and their managers, but changing how hedge funds are regulated could actually undermine the interests of investors and increase economic instability. If hedge funds are significantly restricted in their ability to develop innovative investment strategies, or are required to reveal their strategies to competitors, we all stand to lose from the unique benefits that the funds bring to the economy.