Hedge Fund Vs Efficiency and Evidence

[rahul.goyl]

Hi David,

Is there any fundamental behind this question or just answer by your own obsevation.


With respect to the role of hedge funds and market efficiency:

a.theoretically they should increase efficiency, but there is no evidence that they do increase efficiency.
b.theoretically they should increase efficiency, but there is evidence that they do increase efficiency.
c.theoretically they should not increase efficiency, also there is no evidence that they do increase efficiency.
d.theoretically they should not increase efficiency, but there is evidence that they do increase efficiency.


Thanks
Rahul

 

[David Harper CFA FRM]

Hi Rahul,

It's a *hard* question (IMO) that refers to the Stulz paper where he makes the claim that hedge funds do, in theory, help make markets efficient (it is always good to guess this is true in theory...it is typically a "defense" of a new strategy or instrument that it adds to market liquidity and therefore efficiency) but Stulz acknowledges there is little direct evidence (he cites many studies but none supporting this point)

David