Hedge funds now increase risk rather than hedging it as originally intended

Evidence

Private equity firms and hedge funds share a couple of key features: both are investment firms that cater to wealthy clients, and both charge hefty fees for their ability to extract profit from publicly traded corporations in order to produce “alpha,” an excess return above a benchmark index. In other words, investors are willing to pay higher fees because they are promised higher returns than can be achieved through safer investment strategies. While a PE firm’s primary strategy is the leveraged buyout of a public firm, a hedge fund uses financial instruments and pressure tactics. The term hedge fund dates back to the 1940s, when it described a trading strategy that “hedged,” or limited, risk by betting against market fluctuations, using instruments such as short selling (betting that an asset will decline in value). The term has since been appropriated by speculators for whom leveraging risk (using borrowed capital to increase potential return), and lots of it, is the dominant strategy. In other words, hedge funds dramatically increase risk, rather than limiting or hedging it. — Andrew deWaard, Derivative Media, 142

Categorization

• DEFINE: Clarifies the etymology and semantic reversal of ‘hedge fund’ — originally risk-limitation, now risk-leveraging.
• XREF: connects to: Floating exchange rates created the risk exposure that currency futures were designed to hedge — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 656; Hedging against one default type can worsen losses when a different form materializes — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1036; Financial derivatives now substitute for physical and organizational means of managing corporate risk — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1178