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Easuring Investment Performance. International Investments. Hedge Funds and the Madoff Scandal - Essay Example

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Easuring Investment Performance. International Investments. Hedge Funds and the Madoff Scandal

Measuring Investment Performance – the traditional view that a portfolio manager is to be measured over an entire market cycle is because most people leave their funds to be managed and do not worry too much about market fluctuations. These ordinary investors expect that their monies placed with portfolio managers will grow over time despite the ups and downs of market movements or gyrations. In short, these people expect their capital will grow accordingly and are in safe hands because they believe they had hired the portfolio managers precisely for this type of risk management. They think the cyclical nature of markets will protect their investments no matter what happens, because they believe markets will eventually recover in the long run. This type of thinking or mentality does not take into account the existence of other investing methods such as short-selling, leveraging (buying stock on margins), hedge fund investing and other kinds of esoteric investment instruments such as puts, call, options or other derivative instruments that can typically yield them higher returns without necessarily increasing the investment risks. Their kind of investing mentality is the “buy-and-hold” strategy; hold a particular stock for an enough period of time and the returns (dividends and stock price appreciation) will come naturally. This “plain vanilla” type of investing strategy measures a portfolio manager in terms of performance based on his stock selection (which equities he had bought, how big

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is the firm, the dividend history of the company, etc.) and how well he allocated the funds accordingly based on asset-type allocations (Lawton and Jankowski, 2009, p. 731). This type of an investment strategy mirrors the performance of the economy and if the economy recovers, then the portfolio's worth should recover accordingly too. However, hedge funds adopt a different investing style and this style contradicts the conventional wisdom of the traditional investing strategy mentioned above. For one, hedge funds, if managed exceedingly well, can outperform the markets in either up or down conditions. These funds seem to defy the market dynamics by giving a decent return in all market situations; a well-managed hedge fund is that by billionaire George Soros. (360 words) Diversified International Investments – this is perhaps one of the most persistent myths in the investing and financial services industry today. With a number of esoteric and derivative instruments available today for the sophisticated investor, the belief is that holding a diversified portfolio insulates the investments from financial risks. However, recent market developments in a way had nullified this myth, with some investors losing out in a spectacular way because they made the wrong decisions. In short, these investors who tried diversification failed because of the extreme complexity in today's markets with a good number of extraneous factors which cannot be foreseen altogether, no matter how good the investment management is. Several factors which are often unpredictable to a certain extent are currency exchange rate fluctuations, political risks of a country, price of oil, prices of commodities and futures markets. There are many instances in which even the most sophisticated investing techniques have floundered like LTCM. A good example here would be

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Finance and Accounting Name of Student (author) Student ID Number: Name of School (University) Word Count: 1,173 August 21, 2011 Finance and Accounting Introduction The global financial market is in great turmoil today, as shown by the wild swings in the major stock markets during the past few days and weeks…
Author : conroyalysa
Easuring Investment Performance. International Investments. Hedge Funds and the Madoff Scandal essay example
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