Hedge funds are private investment funds that trade in stock market and formulate many strategies to earn absolute profits regardless of whether the market moves up or down. They are not regulated in the same sense as mutual funds. …
They are not regulated in the same sense as mutual funds. Mostly, high net worth individuals and some pension funds invest in hedge funds. It is not mandatory for them to be registered with the Securities and Exchange Commission because they are not supposed to provide information regarding their operation and valuation in public. The paper tries to explore the early history of hedge funds and how prima facie they are different from mutual funds. The paper also focuses on their role and the impact they created during 2008 financial crisis and also what regulatory measures are currently in force to regulate them. Genesis of Hedge Funds Mallaby emphasizes that Alfred Winslow Jones was the first global hedge-fund manager starting his operations in 1949 without any formal qualification and perhaps he set the tone and style of the functioning of hedge funds that are in vogue today. His way of charging the performance fee was different wherein a straight 20 percent cut was made on net gains while distributing the profits. This deduction was over and above the management fee and even today most hedge-funds continue to have their performance fee policy in the same line. The fund was called so because all along investments were hedged simultaneously – short-selling some of the weaker stocks to mitigate the systemic risks. He used leveraging as a tool to hedge investments. It is worth noting that Jones’s firm made an astounding return of around 5000% during the year 1949 through 1968. Investopedia states that in 1968, around 140 hedge funds were in operations in the US though most of them were out of business due to slump in subsequent years. The hedge funds saw renaissance in the early 1990s but again, many of them including high-profile hedge funds such as Robertson's were in trouble during dotcom crisis of 2000. Hedge Fund Is Not a Mutual Fund Hedge funds are not mutual funds and they differ in several ways. Mutual funds have a large number of retail investors while hedge fund is not interested in a retail exposure and limit itself to a few high-net worth investors. After a minimum lock-in period, investors are free to withdraw the funds in mutual funds but hedge funds usually have a longer lock-out period during which investors cannot withdraw their investments. A mutual fund needs to register with Security Exchange Commission while hedge fund does not have such compulsion. Mutual funds do not undertake speculative activities and focus on returns relative to the bench-mark index. For example, if the bench-mark index goes down by 7 percent but the mutual fund investment goes down by only 4 percent then that will imply that mutual fund has performed better. In contrast, hedge funds focus on absolute returns regardless of the movement of market index. That is why hedge funds employ numerous strategies to earn high returns such as long or short positions on derivative instruments, options and futures. Mutual funds do not resort to such strategies to enhance their returns as they are governed by a host of regulatory measures (Investopedia). Role of Hedge Funds in 2008 Financial Crisis Chung argues that hedge funds were not behind the financial crisis of 2008; however, there is no guarantee that they will not cause one in future. Regulatory authorities, fund managers and lawyers believe that banks and financial institutions were largely responsible for the recent financial crisis because they invested heavily in subprime mortgages. The study also revealed that short-selling done by hedge funds did not aggravate the crisis. Hedge funds are not required to be brought under the scanner of policy makers; nevertheless, it is suggested that regulators need to keep a watchful eye on their activities. Accordingly, now hedge-funds firms are needed to register ...
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CDS – Credit Default Swaps 6 5. Why economic models failed? 8 6. Case Reference – Perspective of HSBC Bank 8 7. Conclusion 9 8. References 11 1. Introduction Financial institutions cater to the needs of different types of customers by providing relevant financial services.
He is also Nobel Memorial Prize in Economics for the contributions of he had in the field of economics. As at 2008, he had written over 20 books and published over 200 scholarly articles in edited and professional journals. The book The Return of Depression Economics and the Crisis of 2008 is an update version of Krugman 1999 work.
Institutions like Lehman Brothers, Citibank, HSBC and many other global financial houses simply crumbled to the unwinding financial crisis. Though the exact causes of the crisis may not be easier to explore and understand however, lax regulations are considered as the major cause of the crisis.
Hedge fund offers diversified investment opportunity to the investors. The hedge fund managers collect the money from the public and invest in diversified constituent of a hedge fund. The investors have the flexibility to withdraw their money at any point of time (Lo 40).
It also addresses the issue on hedge funds as optimal investment strategies.
Hedge fund, as reported by the President's on Working Group on Financial Markets (1999), is defined usually as a variety of different kinds of investment vehicles which have some features in common.
The first part tells about how this came to be and applied by the man who first investigated technical methods of market analysis for an article titled Fashions in Forecasting, and in a few months became a
, the hedge funds have diversified their investment portfolios, and they engage in a wide variety of the investment strategies and have added other financial instruments. They aim at achieving positive investment returns with the use of classes of assets such as the bonds and
anager who makes investments using the fund’s capital in an attempt to produce capital gains and income, and in a manner consistent to the investment objectives stated within the fund’s prospectus.
In exchange for the benefits of mutual funds, investors implicitly accept
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