Vishwanath, S. R. and Krishnamurti, Chandrasekhar (2009) Hedge funds. In: Investment management: a modern guide to security analysis and stock selection. Springer-Verlag, Berlin / Heidelberg, Germany, pp. 589-609. ISBN 978-3-540-88801-7
[Chapter Introduction and Objectives]:
Hedge funds have grown to be an important segment of the world's financial markets. What started as a cottage industry has grown into a $4 trillion business. Hedge
funds now control more than half the shares traded on a daily basis. This chapter provides an overview of hedge funds.
This chapter has the following objectives:
• Define hedge funds
• Distinguish between hedge funds and mutual funds
• Outline strategies followed by hedge funds
All these countries have spent 40 years trying to build up their economies and a moron like Soros comes along with a lot of money to speculate and ruin things.
- Mahathir Mohammad, Prime Minister of Malaysia, 1998
(from 'The Color of Hot Money')
A hedge fund is an aggressively managed portfolio of investments that uses advanced investment strategies such as leverage, long, short, and derivative positions
in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). Hedge funds
may be characterized as private investment programs where the manager seeks positive returns by exploiting investment opportunities, while protecting principal from
financial loss. Hedge funds are quite diverse, as several strategies and techniques can be employed to attain the same investment objectives. Consequently, hedge funds
are synonymous with the term 'alternative investment strategies.' Some hedge funds follow very conservative strategies while others are more aggressive.
Legally, hedge funds are most often set up as private investment. partnerships that are open to a limited number of investors and require a very large initial minimum
investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least I year.
For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the United States, laws require that the majority
of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, along with a significant amount of investment knowledge. You can think of hedge funds as mutual funds for the rich. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more nexibility in its investment strategies.
The term 'hedge funds' is often times a misnomer as some funds may not hedge their underlying positions. It is important to note that hedging is actually the practice
of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge
against the downside risk of a bear market by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Nowadays,
hedge funds use dozens of different strategies, so it isn't accurate to say that hedge funds just 'hedge risk'. In fact, because hedge fund managers make speculative
investments, these funds can carry more risk than the overall market.
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|Item Type:||Book Chapter (Commonwealth Reporting Category B)|
|Item Status:||Live Archive|
|Additional Information:||Chapter 26. Author's version not available.|
|Depositing User:||Professor Chandrasekhar Krishnamurti|
|Faculty / Department / School:||Historic - Faculty of Business - School of Accounting, Economics and Finance|
|Date Deposited:||17 Jun 2010 01:41|
|Last Modified:||12 Sep 2016 02:39|
|Uncontrolled Keywords:||hedge funds|
|Fields of Research :||15 Commerce, Management, Tourism and Services > 1502 Banking, Finance and Investment > 150201 Finance|
|Identification Number or DOI:||doi: 10.1007/978-3-540-88802-4|
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