It does fill a need, and no one expects returns from it, but it most likely is fractionally reserved by btc. This means that if the price of btc drops too low and too many people cash out then it's over, because each tether cashed out will mean more and more btc are required.
I think it is fractionally reserved with bitfenix's btc deposits. A while back you could see their master address, which hundreds of millions of USD worth of btc.
It's not fractionally reserved. Fractionally reserved banking implies that only a fraction of the reserve is in liquid cash (And that the remainder exists as independently audited, but not immediately liquid investments, backed by an insurance policy.)
Tether has never been independently audited, whatever non-liquid reserves/investments they have are not backed by an insurance policy. It is not a fractional reserve. It's a con artist's idea of "Hey, I can just open a bank, take 80% of the deposit money, do 'things' with it, and claim I am running a fractional reserve."
