Hedge Fund Activities - Essay Example

Running Head: Hedge Funds Hedge Funds [Institute’s Hedge Funds Introduction This paper is an attempt to explore, analyze, and critically evaluate the effects of events that happened in financial markets during 2007-2009. However, this paper would first try to sketch a brief picture of hedge funds. Hedge funds are a type of investment fund or investment portfolio, which is only open to limited rich investors. However, there are always expert, disciplined, and diligent managers they hire for managing their investment who charge a management fee and a performance fee from them. This investment portfolio may include long or short-term position and invest in any type of opportunity present in the market like securities, shares, bonds, real estate and others. Regardless of the investment type and place, the goal is to minimize risk and volatility and increase return on investment (Agarwal & Naik, pp. 36-47, 2005). Mostly, hedge funds are not so liquid, at least in the short run, because they require investors to hold their money for at least one year. Technically speaking, the hedge funds market does not have sophisticated regulations. However, President Obama of the United States seems to have some interest to bring comprehensive regulations for hedge funds. Without any doubts, the industry of hedge funds is growing at some considerable extent. This is important to note that the growth rate of this industry has been exponential. This is because these assets valued only 39 million US dollars in 1990 and less than 972 million US dollars in the year 2004 (Agarwal & Naik, pp. 36-47, 2005). However, according to some recent statistics, this industry is now managing assets of worth more than 2.1 trillion US dollars. In addition, the number of hedge funds in 1990 was 610; in 2004, they were 7684 in number and according to the last statistics, there are more than 15000 hedge funds. Experts believe that these figures are understated because of absence of comprehensive legislation and non-uniformity in the definition of hedge funds. Discussion As mentioned earlier that this part of the paper would focus on discussing the evolution of hedge funds and the affect of the financial market happenings on hedge funds during the years 2007-2009. It is important to note that most of the following trends and impacts are directly or indirectly, related to the global recession of that time. As mentioned earlier in the paper that hedge fund managers usually charge two types of fee. A management fee which is usually around 1-2 percent and a performance fee, which is around 10-20 percent (Longo, pp. 20-28, 2009). However, during the period of exponential growth of the industry this fee kept on increasing exponentially, thus decreasing the net return to the investor. Now, during the period of 2007-2009 two important elements took place. Firstly, the global recession, increased the interest rates, increased inflation, and decreased the money supply in the market thus making it a tighter environment for investors, which is understandable during a recession. However, on the other hand due to the profitable and growing outlook of this industry many new financial managers were standing in the queue to get their chances (Anderson, Born & Schnusenberg, pp. 3-8, 2009). These new mangers are actually coming from many banks and other financial institutions and since they have relations with money, they are certainly good in this business as well. Quite understandably, due to the demand and supply concept of economics, the fee charged by these managers has decreased to some extent. However, the process has yet not completed and the market forces are still acting to lower the fees further more (Longo, pp. 20-28, 2009). It is important to note that this has not affected the big fishes in the managerial list that are good performers and are famous for the same. Another dimension of viewing the same situation would be by looking at the recent mergers and shut down of the small management companies (Agarwal, pp. 74-49, 2009). This is because investors are really asking about the optimum size of a good management company. Another trend was the transition or change in the type of investors. During this period of 2007-2009, the profile of hedge funds investor has changed (Anderson, Born & Schnusenberg, pp. 3-8, 2009). Today, most of the investors are institutional investors as compared to the past when most of them were investing on personal or individual basis. Coupled with this, the news of bringing tight regulations by the Obama administration has also changed a lot in the industry. The trend of increased liquidity also came up on the scene during the same period. Most of the hedge funds form a “J curve” pattern on the graph of their returns (Lederman, Townley & Practising Law Institute, pp. 56-58, 2008). Most of these funds show negative returns in the early months but then they grow strongly thus multiplying and magnifying the profits at a magnificent rate. This means that the investor must hold the money as long as he can to gain more returns. However, due to the tight money supply and need for liquidity by investors, the hedge fund managers had to come up with funds with which they had no argument other than the future return for holding the money of investors for more than thirty days (Guizot, pp. 99-105, 2007). Moreover, this trend would continue to remain there until and unless the economies completely recover from recessions (Agarwal, pp. 74-49, 2009). Demand of increased transparency also emerged during this recession. Investors are nor very much concerned about their investments and they want to know and make sure that where the investment has been made and how would the returns be generated? Long gone are the days when this business had its basis on blind faith and trust (Longo, pp. 20-28, 2009). Investors now want to separate manager control from the investment governance. The recent scandals are also one reason of the same. Another reason was the news regarding the record hedge funds loses in the year 2008, which were around 600 billion US dollars in assets. Moreover, the year 2008 was even worse than nightmare for the hedge fund industry when these firms were trying to find out ways to exit the market. However, the year 2009 changed the scenario almost completely (Agarwal, pp. 74-49, 2009). The same firms that were trying doors to exit were trying to come back. Only in July 2009, six new hedge funds firms had set up with a total assets base of more than 2 billion US dollars showing the strength, outlook, and expectations from the industry (Agarwal, pp. 74-49, 2009). For example, Roc capital started in month of July with a capital base of more than 1.2 billion dollars. Another proof was that the number of liquidations of hedge funds in 2008 dropped to around 52 percent in the year 2009. References Agarwal, Monty. (2009). the Future of Hedge Fund Investing: A Regulatory and Structural Solution for a Fallen Industry. John Wiley and Sons. Agarwal, Vikas, & Naik, Narayan Y. (2005). Hedge Funds. Now Publishers Inc. Anderson, Seth C., Born, Jeffrey, & Schnusenberg, Oliver. (2009). Closed-End Funds, Exchange-Traded Funds, and Hedge Funds: Origins, Functions, and Literature. Springer. Guizot, Armelle. (2007). the hedge fund compliance and risk management guide. John Wiley & Sons. Lederman, Scott J., Townley, Danforth, & Practising Law Institute. (2008). Hedge funds, 2008. Practising Law Institute. Longo, John M. (2009). Hedge Fund Alpha. World Scientific. Read More