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Hedge funds - Essay Example

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Hedge funds are growing in the U.S. financial market despite market turbulences. Since its birth in the middle of the 20th century, they have increased in terms of number and total assets. This research paper focuses on the expansion of hedge fund industry in the United States…
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Hedge funds

Download file to see previous pages... The term "hedge fund" involves any pooled investment medium that is (1) organized in private, (2) directed by experienced and professional investment managers, and (3) not accessible to the public. Hedge funds are supported by rich personalities and institutional investors who are regarded as primary investors. Other investors include (1) endowment funds, (2) pension plans, (3) funds of funds, and (4) retail investors. (Boyle, 2007) Other bodies characterized as hedge funds are systematic and limited partnerships and liability companies or most commonly reside outside the United States. (President's on Working Group on Financial Markets, 1999)
Hedge fund originated in 1949. By 1968, 140 hedge funds were operating as reported by the U.S. Securities and Exchange Commission. Within the last 20 years, hedge fund industry bloomed and become common in the U.S. market. According to Phelim Boyle (2007), in the year 1990, a total number of 610 funds are controlling $39 billion worth of assets. By 2000, there were 3,873 funds directing $490 billion assets. The estimated size of the hedge fund industry in mid-1998 was in the range of 2,500 and 3,500 hedge funds controlling between $200 and $300 billion worth of capital, totaling more or less $800 up to $1 trillion in total assets. As compared with other U.S. financial market sectors, hedge funds are relatively small. ...
(President's on Working Group on Financial Markets, 1999)
The Marko Maslakovic (2008) reports that despite the existence of market destabilizations, the hedge fund industry continued to grow in management assets and the number and type of institutions investing in hedge funds. For the assets under management, the hedge fund for this category amounted to over $2,250 billion in the end of 2007. Figure 1 shows the trend of global hedge funds in relation to their assets under management. The number of hedge funds reached over 11,000 in 2007 or 12 percent increase from the previous year (2006). The presence of the increasing credit crisis and increased market volatility did not hinder hedge funds assets from growing by 30 percent in 2007. Hedge funds did not incur any significant influence on the credit crisis because only 5 percent of their assets were examined in mortgage-backed securities in September 2007. Boyle (2007) mentions six (6) reasons for the hedge funds growth: (1) technological innovations, (2) derivatives revolution, (3) specialization, (4) increase of market complexities such as catastrophe bonds and structured products, (5) recent poor market equity performance, and (6) low interest rates.
Figure 1

For the distribution of hedge funds in the world, reports of Maslakovic (2008) show that the United States is the major source of hedge fund investments with 67 percent of the total hedge funds assets in 2007. Europe and Asia are the next large sources with 22 percent and 7 percent shares respectively. New York City is the world's leading city for hedge managers and it is followed by London. In New York, around 60 percent of hedge fund managers are stationed in this city. ...Download file to see next pagesRead More
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