A new academic study asks whether hedge funds make markets inefficient and the answer appears to be ‘no.’
“Hedge Fund Herding and Crowded Trades: The Apologists’ Evidence,” is the work of Blerina Bela Reca of the University of Toledo, Richard W. Sias, University of Arizona and Harry J. Turtle, Washington State University. The authors examined hedge funds’ 13F reports (quarterly filings listing their holdings) to analyze whether “these prototypical sophisticated investors are more likely than other professional investors to engage in potentially destabilizing behaviors.”
There are two points I would like to make about this. Firstly, the basic premise of the study makes an invalid assumption. It assumes that markets are already efficient and that the presence of a hedge fund may make the market inefficient. This is somewhat like saying does politics make politicians stupid. You have to assume that they are not all bum licking, brown nosing, immoral retarded cretins to start with. Im my opinion an invalid assumption.
In any scientific enquiry your initial premise sets the tone for the rest of the process and can if phrased or structured incorrectly invalidate any conclusion you can draw from your research. In this case the question is invalidated by this assumption. However, this is nit picking and I wouldnt have expected economists to be able to design a decent experiment anyway.
Secondly, are more valid question would have been. Are hedge funds good for their investors – the answer based upon all the evidence seems to be no.