Mike — who in addition to being a grad student is also a principal in Hg Analytics — and I had a lunch discussion about hedge funds and the role they play. One of the things that stuck with me was the idea of a charitable hedge fund, which is something distinct from a hedge fund that makes a lot of money and spent it on charitable activities. Instead, it would attempt to use markets to accomplish socially beneficial outcomes.
It would attempt to move market prices as much as possible. For instance, imagine a binary security the hedge fund has calculated should be priced at x but is instead trading at y. A normal hedge fund would try to optimize their trading to move the price as little as possible, in order to maximize their expected return. A charitable hedge fund would instead run the same optimization in reverse, trying to push the price as close to x as possible.
It would be an activist fund with a focus on jobs, or the environment, or some other charitable cause, instead of profits (or the lack thereof caused by managerial incompetence).
It would be selective about the short positions it takes. Inasmuch as market prices can be self-fulfilling prophecies (and I’d like to write more about this idea at some point), the fund would use this power selectively, to reward the good and punish the evil. So a charitable hedge fund would try to provoke raids on Halliburton but buy Greek bonds.
With all the price manipulation and activism the charitable fund would look a lot like an ’80s style corporate raider but in reverse. And it would probably lose a lot of money, but that would be the point.
