This article examines the role that hedge funds play in the financial stability, and the role played by government in controlling the industry. The author believes that regulating 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 paper also provides an overview of the dimensions and structure of hedge funds, aswell the investment methods they employ and their interactions with the global financial markets. The paper also examines the situation of the supervision of hedge funds and proposes various ways to control them more effectively. The paper also provides suggestions for changes to improve the financial markets.
Although the fundamentals of financial markets are identical, strategies utilized by hedge funds could differ. For instance, global macros funds invest in massive financial markets, which tend to be influenced by broad economic trends. Market neutral funds, on the other hand, invest in a range of investments to limit the risk of loss while still delivering high returns. Another strategy is event-driven where the fund invests into stocks when certain 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 investment required for an investment in a hedge fund typically $100 or more, and it differs from fund to 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 the perfect opportunity to diversify your investment choices. 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 operated by a larger group. The investment in these funds is risky It’s therefore important to ensure you have enough funds and income to cover the risk.
Another crucial aspect to take into consideration when looking at the hedge fund manager is discipline background. Before investing in the hedge fund it is advisable to verify their history in the eyes of SEC. The SEC requires that investment advisors provide an Form ADV which contains details about the firm and the clients they represent. The document also reveals any conflicts of interest as well as any other costs. For more information on hedge fund manager’s responsibilities, go to this site of the SEC’s Investment Advisor Public Disclosure search tool.
The risks that hedge funds pose are substantial. Although their returns might not be the most impressive however, they are likely to be modest enough to justify the risk. Along with the risk, hedge funds usually are not correlated with the traditional market, and this could increase the degree of diversification in models. In addition, hedge funds can reduce the overall risk of portfolios 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 Hedge Fund index fell 9.87 percent in 2008 and the dedicated short bias funds lost -6.08 percent during September 2008, the month when Lehman Brothers collapsed. The writers of Regulation of Investment Advisers note that hedge funds typically suffer 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 are less correlated to equity than traditional funds, when compared with other forms of investments.