Hedge Fund Industry Management - Case Study Example

This is a career report on the prospects of joining the hedge fund, which aims to analyse the opportunities in hedge fund industry, and the compensation that can be expected. The analysis is based on the following concepts that affect wage theories: Comparative employment opportunities Human capital theory What goes on at work Pay at work Migration Discrimination Technology at work Hedge fund Hedge fund is a financial system fund that uses arbitrage, buy and sell undervalued securities, trade options or bonds, and invest in almost any opportunity in any market where it foresees impressive gains at reduced risks. For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. This can be used for both short and long term investments. Unlike mutual funds, however, hedge funds typically take long and short positions in assets to lower portfolio risk arising from broad market movements. "The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions." (What is Hedge Fund 2008). A hedge fund may take long positions in certain stocks, and short positions in other stocks, the portfolio beta of which is close to zero. A beta close to zero implies that the portfolio will remain relatively unchanged due to the broad market movement. Such a portfolio will primarily change if the stocks move more than the broad market. In the U.S., laws require that the majority of investors in the fund beaccredited. That is, theymust earn a minimum amount of moneyannually and have a net worth ofmore than$1 million, along with a significant amountof investment knowledge. (Hedge Fund. 2008). Advantages: In both rising and falling equity and bond markets hedge fund strategies tend to have the ability to generate positive returns. Since it is a balanced portfolio it helps to reduce overall portfolio risk and volatility and, therefore, has the potential for increased returns. Hedge funds also have an advantage over other options of investment as it offers investors a wide variety of choices in Hedge fund strategies that can be tailor made to suit the investment objective of individual customers. The fact that hedge funds have higher returns and lower overall risk than traditional investment funds has been proved beyond doubt through academic research. Moreover, this platform provides an ideal long-term investment solution, eliminating the concept of correct time entry and exit from markets. Adding hedge funds to an investment portfolio provides diversification which is otherwise not available in traditional modes of investments. The aspiration of the prospective employee Mr.X. Mr.X is undergoing a graduate course in commerce. His father Mr Y had remained employed in the insurance business, and wanted his son to toe in the same line. Mr.X however, had different ambitions. He weighed the pros and cons of joining the hedge fund industry as well as the insurance sector. He sought the advice of different consultants in the field who gave him the necessary information. He found out that the hedge fund industry was more lucrative and he chose this as his career option. Initially he thought that an undergraduate course in commerce would give him the necessary inputs. When he completed more than half the course content, he realised that he will not able to pursue a career in hedge fund with the knowledge gained from this course alone. He came to know about a large variety of job oriented course relating to hedge fund. So, in the final semester, he pursued a part-time certificate course in hedge fund. Again, he realised that there was a gap between theory and practice. Thus, in order to receive some practical experience, he underwent an internship with a practitioner in hedge fund consultation. Human Capital Theory: Human capital refers to the stock of productive skills and technical knowledge embodied in the labour free of an organisation. Economists consider human capital as one of the significant factors of production or service industry. The four factors of production are money, material, machinery and men. Success or a failure of the organisation mainly depends on the effective combination of these factors. Men will compensate all problems related with other three factors. And hence all organisations need to pay utmost attention with regard to labour power/employee power. This is a modern extension of Adam Smith's explanation of wage differentials by the so-called net (dis) advantages between different employments. The costs of learning the job are a very important component of net advantage and have led economists such as Gary S. Becker and Jacob Mincer to claim that, other things being equal, personal incomes vary according to the amount of investment in human capital; that is, the education and training undertaken by individuals or groups of workers. A further expectation is that widespread investment in human capital creates in the labour-force the skill-base indispensable for economic growth. The survival of the human-capital reservoir was said, for example, to explain the rapid reconstruction achieved by the defeated powers of the Second World War. (Marshal 1998). Human capital is a means of production in which additional investment yields additional output. Human capital is substitutable, but not transferable like land, labour, or fixed capital. The improved dexterity of a workman may be considered in the same light as a machine or instrument of trade which facilitates and abridges labour, and which, though it costs a certain expense, repays that expense with a profit. Human capital can be acquired through formal schooling and on-the-job training. In a rapidly changing society, employee training and development is not only an activity that is desirable but also a commitment that an organisation must invest resources in, to maintain a viable and manageable work force. Training is a short term process utilising a systematic and organised procedure by which non managerial personnel learn techniques, knowledge and skill for definite purposes. Development is a long term education process using a systematic and organised procedure by which a managerial personnel learn conceptual and theoretical knowledge for long-term purpose. There are two kinds of human capital, namely: specific and general. Specific human capital refers to skills or knowledge that is useful only to a single employer or industry, whereas general human capital is useful to all employers. Economists view specific human capital as inherently risky, since firm closure or industry decline lead to skills that cannot be transferred (the evidence on the quantitative importance of firm specific capital is unresolved). Employees at work and pay The employee who works for his livelihood expect from the management: Fulfilment of personal goal and objectives as result of affiliation with the organisation. Wages for securing food, clothing and shelter is a major expectation. The employee chooses the job that brings him either immediate or long range achievement. The employee sells his efforts and knowledge for monetary and non- monetary compensation. Level of performance of employees is a function of his abilities and motivation. First, determine what he can do. Second, determine what he will do. Performance results from interaction of physical, financial and human resources. The first two are inanimate; they are translated into the productivity only when the human element is introduced. Factors such as structure, responsibility, reward, and risk are likely to be determined at an organisational level; issues such as warmth, support, emphasis on performance standards, and leadership style will be mediated locally within particular divisions. The US National Institute for Occupational Safety and Health (NI6SH) rates stress as one of the top ten work-related diseases (Mintner, 1991; Sadri & Marcoulides, 1994). Recently, the use of stress reduction programmes has increased as organisations attempt to reduce the negative effects on employee well-being and company profit (Murphy, 1984; Dewe, 1985). The difficulty with stress 'management' though, is that while it may ameliorate the symptoms it does not address the cause of the problem. (Frederickson and Dewe 1996). Stress is a major factor which affects the productivity of employees. To overcome the stress proper work environment should be provided. A worker is not merely an "economic man" who is only motivated by the pay cheque. Non- economic incentives are sometimes more important in influencing his attitude towards work. Pay for performance is extremely relevant when the economy is sluggish and rising costs make employees prefer extra money to health benefits, paid vacations or other non-monetary benefits. There is also a general consensus that this will work better at lower and middle levels than for upper levels, because performance evaluation is easier at these levels. "At a time of economic slowdowns and uncertainty, a compensation concept such as pay for performance is particularly tempting and increasingly popular". (Can Pay for Performance Really Work 2004). Migration Globalisation is a major fact that leads to migration. Migration is usually considered either a phenomenon or a problem and policy often undermines the integration and participation of diasporas and migrant groups in the organisation. Policies that integrate migration, minorities and cultural and socio-economic issues are rare and inconsistent. The result is that many policy documents exclude minorities from mainstream projects of the organisation. The world is rapidly transforming into a single global economy which encourages migration of employees from one country to another in a large scale. Work on international migration is based on continued monitoring of migration movements and policies in member countries and outside the OECD area, and in-depth analysis of the economic and social aspects of migration. This includes the role of migration in alleviating labour shortages, links between migration, demography and economic growth, and the fiscal impact of migration. (Migration: What's New). Discrimination: The concept of global village will remove all discrimination based on nationality, race, gender, and age. The differential wages based on gender should be abandoned. There should be no upper age limit for superannuation and elderly people should be engaged to work as health level has increased substantially. "Unfair discrimination in employment must not be tolerated. People should not be denied jobs, suffer victimisation or harassment, because of prejudice. It is also damaging for business as they deny themselves access to the widest pool of talent. A diverse workforce brings benefits - such as increased motivation, lower turnover of staff, and access to wider markets." (Smith 2003). Technology: Advances in technology places new requirements at workplace and in customers especially in service sectors. An employee will have to encounter some kind of technological issue in an organisation even if he is not employed in any technical job. Technology is an easily changing phenomenon and an employee will have to update himself with the latest technology in the organisation. Competition in most industries has intensified significantly in recent years, and this trend of hyper competition is expected to continue. Globalisation provides new opportunities for companies in the form of new, previously untapped markets for their products as well as new sources for raw materials and components at significantly low costs. The movement towards single world economy has occurred due to advance in information technology, removal of trade barriers, emergence of high growth market in newly industrialised countries like India, China, Brazil, South Africa etc. These new opportunities are, however, more relevant to service industry than in the manufacturing sector. Telecommunication and insurance which were once the monopoly of governments are now opened for privatisation in the developing countries. Mr.X, an aspirant of career in hedge fund, sees a market beyond his national boundary. Legally, hedge funds are most often set up as private investment partnerships that areopen to a limited number of investors and require a very large initial minimum investment.Investments inhedge funds areilliquid as they often require investors to keep their money in the fund for at least one year. So, this is mostly suitable for investment or deposit purposes especially for those who can hold it for long term. Bibliography What is Hedge Fund (2008). [online]. Magnum/Funds. Last accessed 14 May 2008 at: http://www.magnum.com/hedgefunds/abouthedgefunds.asp Hedge Fund. (2008). [online]. Investopedia. Last accessed 14 May 2008 at: http://www.investopedia.com/terms/h/hedgefund.asp MARSHAL, GORDON (1998). Human Capital Theory. [online]. HighBeam Encyclopedia. Last accessed 14 May 2008 at: http://www.encyclopedia.com/doc/1O88-Humancapitaltheory.html FREDERICKSON, Lesley and DEWE, Philip (1996). The Cognitive Appraisal of Stress: The Influence of Organizational Climate, Perceptions of Control, and Feelings Associated with Stressful Work Events. [online]. Curtin University of Technology. Last accessed 14 May 2008 at: http://rphrm.curtin.edu.au/1996/issue1/cognitive.html Can Pay for Performance Really Work (2004). [online]. HR Human Resource Management. Last accessed 14 May 2008 at: http://www.citehr.com/can-pay-for-performance-really-work-vt1184.html Migration: What's New [online]. Organization for Economic Co-operation and Development. Last accessed 14 May 2008 at: http://www.oecd.org/topic/0,3373,en_2649_37415_1_1_1_1_37415,00.html SMITH, Jacqui (2003). Discrimination at Work - New Laws in Force in UK. [online]. Out-Law.com. Last accessed 14 May 2008 at: http://www.out-law.com/page-4113 Last accessed 14 May 2008 at: http://www.telegraph.co.uk/money/main.jhtmlxml=/money/exclusions/supplements/microsoft06/micro1.xml Read More