What sounds like common sense at first blush can quickly turn into a can of worms upon further investigation. Case in point: For at least ten years, some lawmakers have proposed financial transaction taxes to shackle high volume stock traders, such as hedge funds, and to limit short selling stocks, which sounds like an odd practice on its face, but it does serve a useful purpose beyond making money.
Short selling is betting that a stock will lose value; market analysts describe short selling as a stress-test of the underlying health of the stock-issuing company.
If a hedge fund sees evidence that a company’s stock value is not aligned with its underlying health, it will borrow to obtain some of the company’s stocks, put them on the market, and then wait to see if the price drops before being required to pay-off the loan used to borrow the stocks. Others in the market can see this transaction and gain a more realistic view of the issuing company’s health if the stock price changes.
Clients and the public expect that hedge funds will be trusted community actors, which hold their clients and the public in esteem, so unless evidence is provided to show illegal or harmful behavior, rapid transactions, and betting that some stocks will lose value, should be viewed as acceptable business activities.
Actions based on fraud or insider trading are illegal and so are already banned. Consequently, a debate about taxing and limiting rapid transactions and short selling stocks is not an argument about illegal activities, but instead a debate centered on whether rapid transactions and short selling stocks cause some other harm that might justify penalties and limitations.
To find harm, we must ask: Who invests in hedge funds? Is it only the wealthiest Americans or high-value institutional clients? Might these investors be taking advantage of others in the market? While wealthy Americans do invest in hedge funds, you may be surprised to learn that institutions of higher education also invest in hedge funds to bring in as many dollars as possible to benefit students.
We just ended a legislative session that started with severe cuts to education budgets, including to the Nevada System of Higher Education. NSHE is a public system of education, so taxpayer dollars support this system of institutions that are the foundation of success for many Nevadans. Education opens many doors for students, both professionally and personally, and is key to promoting civic and community engagement later in life. However, higher education in particular can be elusive for many students. The costs can dissuade many students from completing a college degree and can even discourage some from even applying to college.
That is why the Nevada System of Higher Education seeks out investment tools to grow their endowments, thereby providing an affordable pathway to a degree and a brighter future for every student. And this strategy also helps to alleviate the burden on taxpayers.
Relying on hedge funds to provide returns on investments is a smart financial decision. Like foundations, non-profits, and pension funds, educational institutions also must provide for those who depend on them. New regulations on hedge funds could negatively impact students, so I would ask Nevada’s federal representatives to investigate the long-term implications of new taxes on rapid transactions and bans on short selling stocks.
Thousands of students in our state’s higher education system benefit from these investments.
Over three quarters of UNLV students receive some form of financial aid or scholarships. This financial assistance is why UNLV students graduate with substantially less debt than students in most other states. This cost-effectiveness is what draws many students to Nevadan colleges and universities, and what lures economic activity and a long-term workforce to our cities and communities.
Graduating debt-free from a four-year college is extremely rare these days, but Nevada’s higher education makes it happen thanks in part to savvy investment strategies, that includes hedge funds. Lawmakers should protect Nevadan students’ ability to learn and grow through education and keep the burden on taxpayers unaffected by leaving these important financial tools free from unnecessary regulation or limitations.
Sondra Cosgrove is a History professor at the College of Southern Nevada.