By Jason Ader
On the eve of yet another trip by President Obama to NYC, I feel it is important that the Wall Street community continue to remind him that the nation’s top challenge is the economy. The economy is not producing enough jobs, and that is partially because President Obama is the most anti-business president many of us have ever seen in our lifetime.
Hedge fund managers are no strangers to the demonization of their industry and can relate to this statement. In the wake of serious scandals caused by Bernie Madoff, Allen Stanford and Raj Rajaratnam the media and political officials have had numerous examples of “rotten apples” that have done irreparable damage to the reputation of the industry. Hedge funds tend to be pro free markets, pro business and pro capitalism, so in the eyes of some these attributes are another way of saying greedy. Despite these being some of the core principles this country was founded on there continues to be a demonizing effect on an industry whose business model is founded on the pursuit of profits and returns.
Over time the hedge fund industry has evolved from a money management platform solely for wealthy individuals into a tool that helps institutional investors provide retirement security for working people, educational scholarships for tomorrow's leaders, and research and philanthropic endeavors across the nation that benefit a broad spectrum of our society. The industry has worked closely with government to craft rules for creating a safer financial system and continues to be thought leaders for the asset management industry.
There are good and bad politicians. Some of our public servants in Washington do make a difference for this country, while others we hardly notice. Then there are those who we know from scandalous headlines, and others whose work is worthy of our praise and respect. The same can be said of hedge funds.
Founding father Alexander Hamilton, who served as the first U.S. Secretary of the Treasury, understood the risk of political demonization when he said that “In politics, as in religion, it is equally absurd to aim at making proselytes by fire and sword. Heresies in either can rarely be cured by persecution.”
The hedge fund industry evolved from a money management platform for wealthy individuals into a tool that helps institutional investors provide retirement security for working people, educational scholarships for tomorrow’s leaders, and research and philanthropic endeavors across the nation that benefit a broad spectrum of our society.
Hedge funds are considered by all of the above as a nimble investment tool aimed at mitigating risk to protect and grow assets. Data compiled by the Managed Funds Association (MFA) indicates that 61% of the money invested in hedge funds comes from institutions, and recent data suggests that 35% of U.S. pension funds and endowments are expected to increase their allocations.
Hedge funds are building retirement security for Americans. Many public and private pension plans, which rely on hedge funds to diversify their portfolios, manage risk and produce reliable returns, provide retirement security to millions of families in America and around the world. As of March 2011, there were 295 public pension plans worldwide known to be allocating to hedge funds, up from 196 in 2007 before the financial crisis, according to the MFA.
General Motors’ pension fund has nearly doubled its hedge fund investments in the past 5 years to $11.9 billion of its $87.8 billion portfolio in 2010. The $1.6 billion Educational Employees’ Supplementary Retirement System of Fairfax County, Virginia announced in April 2011 that it was boosting its hedge fund allocation from 5% to 8%. The New York City Police Pension Fund has allocated $159 million to hedge funds and some of New York City’s other pension funds continue to explore hedge fund investments.
The hedge fund industry is very closely tied to improving the quality of life for Americans. Foundations, with investments in hedge funds, support communities in the U.S. and around the world through improvements in education, health and economic issues as well as an emphasis on arts and cultural development. For example, the Ford Foundation, which works to strengthen democratic values, reduce poverty and injustice, promote international cooperation and advance human achievement held $1.8 billion in hedge fund investments at the end of fiscal year 2009, 18.4% of its total assets.
For many educational institutions, hedge funds are an important tool used to diversify their portfolios, manage risk and produce reliable returns. Hedge fund investments help these institutions play a critical role in funding student scholarships, financial aid, research, athletics and other programs.
Hedge funds have become a constructive part of main street America. In South Dakota, for example, a state far from New York or Greenwich, Connecticut, Hedge funds help provide retirement security to more than 75,000 workers and retirees through investments held by the South Dakota Retirement System. South Dakota universities, such as Augustana College, allocate funds to alternative investments to help grow their endowments and provide resources to students and faculty. Universities use investments held by endowments, including hedge funds, to support scholarships, athletic programs, cutting-edge research and renovation, maintenance and construction of facilities.
Chances are that if you have a child attending college on a scholarship they benefit from alternative investments held by universities. In many ways, South Dakota is a leading example of how hedge funds help institutional investors provide valuable benefits to local residents. Private sector employers such as Wells Fargo and 3M also use hedge funds to help fund their pension obligations and improve the quality of life for workers and retirees.
Hedge funds are heavily regulated compared to most businesses. Hedge funds are registered with the Securities and Exchange Commission and subjected to trading restrictions. The Dodd–Frank Wall Street Reform and Consumer Protection Act, a bill passed in 2010, requires fund advisers with $150 million or more in assets to register with the SEC. They are subject to the anti-fraud provisions of the Securities Act of 1933, and only accredited investors can invest in hedge funds.
Not say that the hedge fund industry does not have its imperfections. It has stumbled and had its fair share of negative headlines, no differently than have many of our leaders in Washington. It’s hard to argue, however, that the hedge fund industry has not evolved and matured through economic Darwinism, transparency, liquidity and the heightened regulatory demands required of its investors compared to the first investment partnership founded by Alfred Winslow Jones in 1949.
While there is no perfect investment structure, the hedge fund industry continues to make improvements to satisfy the needs of many in our society.
Jason Ader is the founder and chief executive of Ader Investment Management (AIM), a NY-based asset management firm. He is on the Board of Directors of the Las Vegas Sands Corp., one of the world's largest hospitality and gaming companies; and Western Liberty Bancorp. Before forming AIM, Ader was a equity and high yield analyst at Bear Stearns.