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An year ago, I asked the hedge fund owner I worked for: "What is the main benefit for the people, the society and the market from what the hedge funds do?". He simply answered that "They make the market more fair".

But how is this helping anyone? Isn't faster convergence to prices where less arbitrage opportunities exist, bad for the other investors? What are the benefits from a fairer market, in general?

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    $\begingroup$ The answer that your former employer gave is a poor answer to a poor question. Hedge funds should not be considered a general category for investors. There are many different types of funds that do many different things. How each fund helps an investor (or not) cannot be answered categorically. There are some that enhance investor value and others that detract from it. $\endgroup$ – amdopt Jun 13 '18 at 18:00
  • $\begingroup$ Perhaps a more productive approach is to ask, "what are the economic functions of a financial system?" Then examine how different types of hedge funds fit into that landscape. $\endgroup$ – Matthew Gunn Jun 13 '18 at 22:26
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You might find this paper interesting: "Does Finance Benefit Society?"

It's a very complicated question and in my opinion the above paper provides a nuanced answer.

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This question is quite broad and subjective so is probably best reformulated to be slightly more specific, but in general a more liquid, more active market is better for everyone since;

  • prices become more transparent helping those with lesser specialist knowledge.
  • pricing from market makers is usually more competitive and cheaper, since they have better cumulative knowledge and expectation of cheaper hedges in tandem.

Your comment about a lack of arbitrage opportunities is not correct. Markets are zero sum games, where one party can profit another party inherently loses, either directly or indirectly, and a genuine arbitrage opportunity represents one party gaining at the genuine expense of another through nothing more than systematic misunderstanding of pricing. By creating price transparency and competing for any arbitrage opportunities that do appear, hedge funds are one factor that contributes to the result of arbitrage occurring less often and to lesser effect. Which is arguably more fair on those who stood to lose.

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    $\begingroup$ "Markets are zero game sums" -- This is not correct factually or grammatically. $\endgroup$ – amdopt Jun 13 '18 at 18:00
  • $\begingroup$ How would a person with lesser specialist knowledge would see more clearly whether an investment in certain stock is worth to make, if the stock's price changes more frequently? If it follows a particular trend more clearly, as a result of this higher liquidity, yes - the liquidity itself might help(tho a return on an eventual investment would be lower), but what if the higher liquidity just increase the variation in the stock's price, making the trend even less transparent? $\endgroup$ – sdd Mar 20 '19 at 1:52
  • $\begingroup$ If a stock price is more liquid it will typically have a tighter spread meaning you have less of a cost to entrance and exit, which is directly related to your investment decision. I do not associate knowledge of the liquidity with the ability to forecast the stock price or its volatility. $\endgroup$ – Attack68 Mar 20 '19 at 6:15

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