David Dayen: What Good Are Hedge Funds?

Hedge funds make big returns by manipulating markets in ways that are illegal for small investors. Remind us: Why are they permitted?

In the pilot episode of the Showtime drama Billions, a CNBC host grills Bobby Axelrod (Damian Lewis), founder of the hedge fund Axe Capital, at a public forum. “How do you respond to the criticism that hedge funds are the scavengers of the financial sector, and that a select few have undue influence on the markets?”

“We’re not scavengers,” Axelrod replies. “We’re white blood cells scrubbing out bad companies, earning for our investors, preventing bubbles. A hedge fund like mine is a market regulator.”

This claim invites an important debate: Do hedge funds represent an asset to the larger economy, or a menace? Do they really help make markets more efficient and transparent, or do they just exploit opportunities at the expense of other investors?