Hug rationing

FT alphaville suggests hugging a hedgie. I beg to disagree with most of their reasons. Let's go one by one.

1) They provide liquidity. More liquidity equals less market volatility.

Nope. The hedgies are often close to one way. They provide liquidity when we don't need it, as bubbles inflate, but they all rush for the exit when the bubble bursts, making the fall worse and exascerbating downside illiquidity.

2) They help burst bubbles. Short selling is as popular as a cold sore under the mistletoe. But who can now say the shorts were wrong about the banks?

Case unproven. Some funds were short; others were long. Shorting is a good thing, but the hedgies are not necessary for it to persist as a mechanism for enhancing market discipline.

3) They help restore confidence. It’s hard to invest when credit is in short supply, but hedge funds naturally play host to the kind of inspired risk-takers who will spot likely gems in the rubble and pull them - and us - out of the downturn.

Possibly true, but their business model relies on leverage, and that is in short supply. There is no reason non hedgie investors cannot play the same role.

4) They innovate. Innovation is a dirty word. Combined with excessive leverage, it has proved a dangerous concept, but properly applied, it will provide creative fuel for recovery.

Nonsense. Most product development is done in banks. Hedge funds are typically too small and too profit focussed to innovate. I can't think of a single product they invented rather than simply bought.

5) The survivors will be better people.

So clearly nonsense I won't dignify it with any further comment.

6) The survivors will cost less to employ. The industry’s mid-2007 fee structure looks as outdated as a 1929-vintage stock ticker machine.

That's like saying a Bentley at £200K is a bargain because it used to be 300. It's still a very expensive way of getting about, and damaging to the environment to boot. Talking of boots, how about kicking hedgies? It could be more fun than hugging them.

7) They help prop up the economy. Do you really want to witch-hunt all that wealth out of Mayfair?

Err, do I have to answer that? But the concept of stalking Mayfair with a matched pair of Purdey's taking out Porsche drivers is quite attractive for, say, a video game...

Seriously, though, I'm not anti-hedgie. But I do think that their leverage is dangerous and that the one way nature of their liquidity provision is not helpful to financial stability.