This paper examines the importance that hedge funds play in ensuring financial stability, and the role played by government in controlling their activities. The author suggests that the regulation of hedge funds is an ongoing concern for the government in addition to the fact that there’s many possible reform ideas to think about. The article also discusses the dimensions and structure of hedge funds as well in their investment strategies and interactions with the global financial markets. The paper also examines the status of supervision for hedge funds and proposes various ways to control them more effectively. The report also includes suggestions for reforms to help the larger financial markets.
Although the fundamentals of financial markets are similar, their strategies utilized by hedge funds can differ. For instance, global macros funds invest in huge financial markets, which tend to be influenced by broad economic trends. In contrast, market neutral funds invest in a range of securities in order to reduce the risk of loss while still delivering high returns. Another strategy is event-driven where the fund invests into stocks when particular corporate event has an immediate influence on the price of the security. This kind of fund typically makes use of leverage to increase return.
The minimum amount for investment in the hedge fund is usually $100 or more, and it varies from fund the fund. However, the majority of funds require investors who are accredited for investments between $25k to $1 million. While hedge funds are not suitable for beginners however, they offer an excellent way to diversify investment options. For instance, if you’re looking for an alternative to a more cautious approach then you could look into an investment fund made up of hedge funds that are run by a larger fund. It is risky It’s therefore important to ensure that you have sufficient resources and income to bear the risk.
Another crucial aspect to take into consideration when looking at the hedge fund manager is discipline record. Before investing in an investment fund it is advisable to verify their history before registering with SEC. The SEC demands that investment advisors provide an ADV form. ADV which contains details about the company and their clients. This document also discloses conflicts of interest or other costs. To find out more on hedge fund manager’s responsibilities, check out the website of the Securities and Exchange Commission’s Investment Advisor Public Disclosure search tool.
The risk associated with hedge funds are substantial. Although their returns might not be always spectacular however, they are likely to be insufficient to justify the risk. Along with the risk, hedge funds usually are not correlated with conventional markets. This could increase the degree of diversification in models. Additionally, hedge funds could lower the risk of portfolios overall by having a favorable negative capture profile. So, selecting a hedge fund that has a low degree of relationship to traditional markets is vital.
In the end, hedge funds typically perform badly in bear markets for equity. For instance, the Credit Tremont/Sudex Hedge Fund Index fell 9.87 percent in 2008 and the dedicated short bias funds lost -6.08 percent in September 2008, the month when Lehman Brothers collapsed. The writers of Regulation of Investment Advisers note that hedge funds are often suffering from poor performance in bear markets. This is due to the fact that they aren’t able to predict market trends. For example hedge funds have lower correlation to equity than traditional funds, in comparison to other kinds of investments.