Question

Please answer the following two essay questions

1. 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.

2. Should large securities firms be allowed to be independent and insulated from bank regulation, or should they be required to register as bank holding companies, and therefore be subject to bank regulations? Write a short essay that supports your opinion.

Answer 1

1.

This is true that hedge funds are not allowed to advertise because they are only meant for HNI clients and not for retail customers.HNI's are more sophisticated in knowledge than retail customers and they can ask money from them only.This hedge funds also suffer from survivorship bias and backfill bias which can be evaluated by the HNI's as they can hire someone for due diligence but retails customers doesn't have so much of knowledge and experience to do all this sort of work.Hedge fund managers also claim that even if the market is not good ,they will give us the superior return than others by involving in various equity trading strategy like buying distressed securities,buy and hold strategy,etc.They do involved in short bet position to earn alpha during bad days.

2.

Yes institutional investors should follow their own methodology to trade rather than depend on banks.Banks basically involves in front running which impacts institutional investors and they suffer losses.So,there should be regulatory authorities for each and there is no need for institutions for registering themselves as holding banks.Also after Gram leach bliley act 1999,all the banks,investment banks started working together which created housing crisis in 2007-2008.So,both of them should operate independently as per Glass Stegall Act 1933.