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?
There are roughly 11,000 such funds—investment vehicles that control a mix of client dollars and borrowed money, with a corporate structure that exempts them from most investment-company regulations. We know that hedge funds have made a small subset of financial titans fabulously wealthy. The top hedge fund executives make a billion dollars a year or more. Hillary Clinton and Bernie Sanders are fond of saying on the campaign trail that the top 25 hedge fund managers earn more than all of America’s kindergarten teachers combined. But does this orgy of wealth create value, or merely extract value, at the expense of workers, companies, and other investors?