Question

CRITICAL THINKING QUESTION Hedge Fund Strategy A critic recently claimed that hedge funds cause market volatility to increase when they publicize (and document) that a public corporation exaggerated its earnings. The critic argued that hedge funds should not be allowed to make such public statements, and should not be allowed to take short positions that bet against the firm that is being criticized. Write a short essay that supports or refutes this opinion.

Answer 1

One has to understand hedge fund before critic the mention statement. Hedge fund generally get benefitted by some strategies which are generally not taken by individual investors. They genreally trade on volatility, short sale, currency arbitrage, long short, distressed investing strategies. This all stragies are very risk and can lead to huge losses as well.

In the mention statement if company is taking stort position in distressed firm then it will try to get more profit by this strategy. There is nothing wrong in it since they are generating profit by shorting strategy which may lead to huge loss if the hedge fund report on the company become false and share price of that company increases significantly. Hedge fund profits are linked with the performnace of there stratgeis if it get wrong then hegde fund has to bear the consequences which sometimes may lead to bankruptcy.

So I rufutes the above opinion.