By Bryan N. Corbett
February 19, 2021 at 5:00 am ET
Lawmakers in Washington, D.C., convened a congressional hearing yesterday to assess the recent internet-driven market frenzy surrounding GameStop. During the hearing, lawmakers heard from professional and retail investors who expressed differing opinions on their investment strategies. Some might assume there is a natural tension between professional investors and the influx of individual investors that have entered the financial markets in recent years — but this is just plain wrong. We are all investors, and the idea of more people participating in financial markets — be it individuals or institutions — is good for Americans, good for markets and good for the overall economy.
Hedge funds value and respect the markets and everyone who participates because we know firsthand how investments serve as an unrivaled catalyst for shared economic growth and opportunity. The democratization of financial markets reduces barriers to investing for everyday Americans. This in turn enables more investing, saving and financial well-being for American families.
Broadening access to investment opportunities for individual investors also brings more diversity of thought and the free exchange of ideas to financial markets. Individual retail investors are like all investors: All investors express opinions through words, and most importantly, through investments. These bull and bear opinions are all part of healthy functioning financial markets providing liquidity, flexibility and efficiency. The hedge fund industry supports this participation. It fuels economic growth by providing more funding to businesses, enabling the creation of jobs and increasing our nation’s economic prosperity. The only participants who aren’t welcomed are cheaters and manipulators, whether they are individuals or institutions.
This new frontier of investing, however, comes with a degree of risk. It’s the one constant to investing.
All investors should be clear-eyed about market risks and the prospects for wins and losses. Hedge-fund managers know the risk. They spend significant resources to understand their investments and implement compliance and risk-management procedures. Hedge funds were not bailed out by taxpayers in 2008 and continue to operate with no expectation of receiving federal bailout money.
All participants in financial markets should understand and respect the risks involved and invest accordingly. This is critically important as more and more individuals participate in the market and are exposed to natural market swings and volatility. Ultimately, the more people who understand, believe in and sustain fair markets, the healthier markets become.
The David vs. Goliath narrative may sell papers or score political points, but it misses a fundamental truth: Broad access to and participation in financial markets makes them stronger and healthier, and hedge funds in particular play an essential role. The industry helps to ensure our stock and bond markets function more smoothly and prevent asset price bubbles or crashes. The industry also helps to identify corporate fraud and root out abuse by exposing mispriced assets through strategies like short selling. Hedge funds also help promote market liquidity, which means more willing buyers and sellers are available when investors want to make a transaction.
Hedge funds may exist on Wall Street, but they benefit Main Street. Americans may be surprised to learn that the biggest beneficiaries of hedge fund investing are retired teachers, firefighters, police officers and others from the public sector living on a pension.
In addition to helping secure retirement for some 26 million Americans, alternative investments fund the education for thousands of students at more than 300 colleges and universities. Hedge funds also support life-changing work in communities through investments from nearly 1,000 nonprofits and foundations, like those that have played an important part in our nation’s pandemic response over the past year. Hedge funds help companies and entrepreneurs access capital through markets to grow their businesses, create jobs and innovate. This role is especially vital following the economic fallout of coronavirus.
Yesterday’s hearing was an important opportunity to have an earnest conversation about our financial markets and managing risk. We shouldn’t waste any more time pitting one investor against another. Instead, we should encourage as many buyers and sellers as possible and allow the markets to do what they do best – create expanded economic opportunities for all Americans.
Bryan N. Corbett is the president and CEO of Managed Funds Association.
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