Hedge funds don’t deserve all the blame

NEW YORK – It’s become very popular to blame once high-flying hedge funds for an array of Wall Street’s ills, from rising oil prices to the market’s April slump. And why not? They’re unregulated, have grown enormously in dollar terms, and yet, on the whole, they’re failing to produce solid returns.

A hedge fund is a kind of mutual fund that requires a large initial investment and has been traditionally aimed at the wealthy. Hedge funds don’t invest in a stock or bond and hold it the way most funds do; instead they buy and sell quickly and can make money by betting that a given stock will go down as often as they bet it will rise.

Hedge funds have become Wall Street’s favorite bogeyman when markets fail to perform.

Yet despite the fact that the global hedge fund industry now has more than $1 trillion under management, up from $480 billion in 1999, it’s difficult to say hedge funds can be blamed for 2005’s sluggish market. Indeed, most measures of market volatility remain very low.

At worst, hedge funds tend to accentuate or blunt a trend already in place. However, the industry’s problems are having more subtle effects on the markets.

The problem is that while the number of investing strategies are relatively finite, the amount of money flooding into hedge funds has seen stunning growth.