Alternative Investment Management Association Representing the global hedge fund industry
We explored the positive impact that hedge funds and other capital markets participants bring to economic growth in ‘Capital Markets and Economic Growth: Long-term trends and policy challenges’.
According to research which we commissioned, capital markets are significant drivers of economic growth and increasing their size could compensate for the post-financial crisis decline in bank lending. Growing capital markets by one-third could fuel a long-term real growth rate in per-capita GDP of around 20%, according to the original research outlined in the paper by Christoph Kaserer, Professor of Finance, Chair of Financial Management and Capital Markets, TUM School of Management, Munich; and Marc Steffen Rapp, Professor of Finance, Accounting & Finance Group, School of Business and Economics, Philipps-Universität Marburg, Germany.
The research found that capital markets support economic growth by providing new sources of funding for long-term investment and facilitating improvements in corporate governance. It went on to link activities by hedge funds and other capital markets participants such as pension funds to growth in the real economy. Capital markets comprise stock and bond markets and capital markets activity includes both debt and equity financing.
The paper also revealed the extent to which economies traditionally regarded as bank-based have embraced capital markets and suggested that the old distinctions between the bank-based economic structure of parts of Europe and the more market-based structure of the UK and US are rapidly disappearing.
Although the paper takes as an example the economies of the European Union, it showed how governments globally could benefit from a well-developed capital markets policy. We believe this is especially true for countries where a bank based economic model still dominates. At a time when bank lending is not keeping pace with demand, the global economic recovery could be jeopardised unless new sources of financing can be found, particularly from the investment management community, AIMA said. We therefore encourage governments globally to implement policies that help to protect and grow capital markets.
“The study highlights the positive role that hedge funds can play [in the real economy], using their expertise and willingness to create positive governance changes in the firms in which they invest. Hedge funds are also important providers of liquidity, risk management and price discovery in capital markets.”