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Open Letter to Wells King

Mr. King:

I just read your essay, “Coin-Flip Capitalism: A Primer.” You claim to show that hedge funds and private-equity operations perform poorly relative to your benchmarks. That might be. If so, you’ve done a good service for investors by exposing poor options for using their funds.

But I can’t help but wonder why investors themselves haven’t by now figured out what you claim to show. They are, after all, investing their own money. Because people personally gain from their wise investments and personally suffer from their unwise ones, each person has strong incentives to invest wisely.

You, however, obviously believe that people who invest in hedge funds and in private-equity operations nevertheless consistently invest unwisely. And you offer a list of problems that allegedly are thereby created by the unwise decisions fostered by today’s financial markets – problems suffered not only by these stubbornly stupid investors but also by society at large.

On your list, for example, is this asserted problem: “Floods of capital intent on ‘disruption’ can dismantle established industries while failing to build sustainable businesses in their stead.”

Well, yes, such unprofitable investment can indeed happen. And it surely does so sometimes. But the relevant question is: How often? You offer no answer to this question, although your inclusion of this problem on your list suggests that you believe it to be chronic. (It’s amazing, by the way, that investors who keep losing money somehow always have more lying around to be eagerly invested in additional losing projects.)

If you’re correct about the chronic failure of these investments, the question then becomes: What to do about it? Because you work for American Compass – whose founder, Oren Cass, endorses industrial policy – you likely believe that entrusting more investment decisions to politicians and bureaucrats would result in a better allocation of capital. But industrial policy has its own problems, chief among them being politicians’ and bureaucrats’ inability to know how to allocate capital wisely.

Fortunately for society, however, you exist. Your apparently superior knowledge of financial markets and investment options means that you can earn a personal fortune while simultaneously improving the economy’s allocation of capital. Put your money where your mouth is, quit American Compass, and set up shop as a private investor.

If your assessment of the current state of financial markets is correct, you’ve discovered a vast opportunity for personal profit. Investors, having learned from you how they’ve been throwing their money away, will entrust their funds to you. You’ll then be able to direct these funds in ways that earn high returns for your clients, earn handsome fees for yourself, and are a more productive allocation of capital for society.

If you know what you claim to know, there’s no reason for you not to do as I here propose. Yet if you don’t do as I here propose, then we have strong evidence that you yourself really aren’t confident in the assertions that you present so confidently to the public – in which case we are all well-advised to significantly discount the policy advice offered by you and your colleagues.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030


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