What are Hedge Funds?
Hedge Funds: What are they, do I need them?
Hedge Funds are eclectic investment pools generally organized as private partnerships and often located offshore (outside the mainland) for tax and regulatory reasons. Their managers who are referred to as Hedge Fund Managers are normally paid on a fee-for-performance basis. These people are at liberty to use a variety of investment techniques including 'short positions' and 'leveraging' to hike returns and cushion risks. Though Hedge Funds often use derivative financial instruments, i.e. securities like Options whose value is derived from the value of other underlying financial assets in their investment strategies, they should not be misinterpreted with derivatives.
Hedge Funds were first implicated during the 1992 crisis that led to major exchange rate re-alignments in the European Monetary System as also in 1994 after a period of turbulence in the international Bond markets. Concern further mounted in 1997 in the wake of financial upheavals in the Asian market. The situation got further aggravated in the next year with allegations of large Hedge Fund transactions in several Asian currency markets, primarily in the Hong Kong SAR and Australia with the near collapse of a major Hedge Fund called LTCM (Long Term Capital Management).
Authorities, apprehending this new threat to world financial markets, stepped in to coordinate a successful but controversial private sector rescue of LTCM. Yet, for all this attention, very little practical information is available about the extent of Hedge Fund’s activities and its operations. Besides, despite profusion of suggestions for reforms, no consensus exists on the implications of Hedge Fund activities for financial stability or what policy should be adopted as rectification. However, while Hedge Funds are a rapidly growing part in the financial industry, the fact that they operate through private placement and restrict share ownership to rich individuals and institutions, frees them from very many disclosures and regulation requirements that apply to mutual funds and banks. Also, funds legally domiciled outside the main financial market countries are generally subject to even less regulation.
Thus, the concerns centering around Hedge Funds continue.
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