Dont blame hedge funds for credit crisis: AIMA

Date: Thursday, April 10, 2008
Author: Bryan Borzykowski, Advisor.ca

Everyone looks for a scapegoat during times of crisis, and for many fed up with the credit crisis, hedge funds are to blame. The Alternative Investment Management Association, however, is taking issue with what it sees as "unwarranted criticism."

"People have been taking pot shots at hedge funds," says Phil Schmitt, president of AIMA Canada. He adds that much of the debate has centred on shorting. "It's really easy to take short-selling out of context, so the users of short-selling are often the lightening rod of criticism."

Schmitt's comments come on the same day that AIMA's global chief executive Florence Lombard released a strongly worded letter decrying what she sees as unfair attacks against the hedge fund industry.

Hedge funds are "investment funds that offer investors access to a wide range of asset and investment strategies, which can offer downside protection in difficult market conditions" and that without them new financial areas "would not grow and flourish," Lombard wrote.

Schmitt says the general public has always had a misunderstanding about hedge funds. "It has been alleged that short-selling leads to market manipulation, but that been refuted academically and in practice," he says.

Schmitt also says the letter wasn't prompted by anything specifically, just that the press was turning "this into a public interest story when in fact it's not."

Christopher Holt, a hedge fund industry analyst and editor of Allaboutalpha.com, says AIMA's frustration is warranted; most of the news coming from the mainstream press is misguided.

"The mass media tends to view hedge funds as a human interest story and not as a financial story," he explains. "Excessive compensation, the romance of high finance — that's what sells papers, not the nuts and bolts of how capital markets work."

AIMA's not trying to duck criticism, says Schmitt, but he does want what's said to be put into context. "There are around 10,000 hedge fund managers out there, and the stories focus on less than 10," he explains. "In times of stress you do look for a scapegoat, and we're not the only ones being targeted, but we're trying to correct that misconception."

However, part of the problem is a result of the closed door policy that many hedge funds practise. In its release AIMA says that hedge funds are now "part of the mainstream of the asset management industry," but many firms have no interest in discussing the hedge fund business with the press.

"There's no reason for the hedge funds to respond to this," says Holt. "It's in no one's economic interest to bother responding [to the press]. It doesn't help the business to worry about what the New York Post is saying."

He says hedge funds should be speaking out to help combat the industry's negative stereotypes. But, he admits, the firms who want to focus solely on the business, which is most of them, won't bother.

"It's a complicated matter," he says. "I see where AIMA's coming from. It just boiled over. For me it's boiled over a long time ago. But what can you do as one of the few voices who want to get the truth out there?"

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com