The following is an online summary of this particular AIMA paper

Introduction

Hedge funds make an integral contribution to deep, diverse and accessible capital markets and the financing of the UK economy. They do this by providing liquidity, improving corporate governance, and undertaking investments which other investors may be reluctant to hold.

This comprises of investing in and lending to UK companies, including small and medium enterprises (SMEs), firms in difficulties, firms which carry out significant R&D expenditure, as well as infrastructure and real estate projects.

With institutional investors like pension funds and charitable foundations now accounting for the majority of funds invested in the industry, hedge fund investment strategies have become mainstream. The existing levels of transparency and regulation of the industry render the old stereotype of hedge funds as opaque to investors and regulators as inaccurate.

Our industry also has a long history of contributing to policy debates in order to shape effective regulation. AIMA’s latest offering is an in-depth report entitled Capital Markets and Economic Growth. The findings and key implications for UK policymakers are summarised opposite.

Jack Inglis
CEO
AIMA

The study’s key findings at a glance

1. Deeper capital markets enhance economic growth
The balance between market finance and bank lending matters, with over-reliance on banks coming at a cost in terms of reduced economic growth. The study estimates that growing capital markets by one-third could fuel a long-term real growth rate in per capita GDP by around 20 percent.

2. Asset managers support capital market growth
The regulatory environment for funded pension schemes is an extremely important driver for capital market size. The report’s authors estimate that increasing the size of pension funds by 10 percentage points of GDP could lead to an increase in stock market size of 7 percentage points of GDP. A broad spectrum of asset managers − from passive investors through to dynamic and active investors such as hedge funds − complements the effectiveness of capital markets by enhancing market liquidity and providing capital for potentially riskier business investments.

3. Active investors can effect positive governance changes, improving the allocation of resources in the economy
Hedge funds play a vital role in capital markets using their expertise and willingness to engage with, and create positive governance changes in, the firms in which they invest. Good governance practices make for better performing firms over the long-term and ultimately protect and enhance the value of people’s savings and pensions.

4. Capital markets are good for Research and Development (R&D)
Firms’ R&D intensity is positively correlated with the level of equity financing. The study provides evidence that firms in bank-based economies have less flexibility in their financing decisions and therefore follow a more conservative financing strategy. This might lead to underinvestment in R&D.