Hedge fund investors and other investor do provide some service to society by improving the efficiency of the market. And some of the great investors have been decidedly activist in the management of the companies in which they invested their money, thereby helping to counteract the passivity of the investment institutions. But a huge wedge of investment activity is purely speculative in nature. And the size of rewards does not correlate with the contribution of their activities to society, Such investors belong somewhere close to lottery winners. Meanwhile there is surely a legitimate question about quite how many lotteries a society should have - and indeed how large the prizes should be.
But this I don't mean to suggest that investment success is always down to luck; rather the activity does not add a great deal to society's overall welfare but redistributes it from others to the successful investor. The genius of the great speculative investors is to see what others do not, or to see it earlier. That's all. This is a skill; of that I have no doubt. But so also is the ability to stand on tiptoe, balancing on one leg, while holding a pot of Earl Grey tea above your head, and successfully pouring the contents into a cup that is seven feet below you on the ground, without spilling a drop. I am not convinced, though, of the social worth of such a skill, still less of the wisdom of encouraging the brightest and the best of our society to try to perfect it.
Yet that is what we have done with financial markets. It is commonplace for successful businesspeople to look on the activities of those in the public sector with disdain since what the latter do, they think, is merely redistributing wealth, rather than creating it, thereby imposing a burden on those who do create wealth. This view is not without some justification. However, the irony is that some of the activity that takes place in the public sector is genuinely creative, while the large part of what goes on in financial businesses, owned and managed by the private sector, is completely about distributing wealth - with large parts of the loot going to the practitioners.
Monday, 15 November 2010
The value of fund management
I picked up a cheapo second-hand copy of Roger Bootle's The Trouble With Markets recently, and rather good it is too. Definitely one of the better examples of the 'crisis publishing' genre. Here's a nice little snippet about investment management, about whose merits he (like John Kay) is rather sceptical.