Hedge Fund Reader : Evolving Hedge Fund Industry

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January 19, 2006

Evolving Hedge Fund Industry

The hedge fund industry has underwent tremendous growth in the last decade, expanding by some estimates from about 300 funds in 1990 to over 3000 today. This segment has attained high visibility in the markets and also in the press, and is reported to command up to US $400 billion in capital before leverage.

Hedge funds, like other investments including real estate, commodities, venture capital, and private equity, are known to offer access to returns that are uncorrelated with traditional investments, and superior risk adjusted returns as well.

Also a growing trend among fund management companies is to introduce hedge fund like investment vehicle to large asset owners – so these asset owners can make strategic allocations to hedge funds. Capital markets analysts world over have outlined favorable outlook for hedge funds going forward, as hedge funds have the potential to attract investors who want to enhance strategic asset allocation for both pension funds and endowments funds.

Research shows that when structured as portfolios, hedge funds have the potential to provide a substantial improvement in the risk-reward matrix for the investor community.
To define hedge funds broadly it can be said that these are unregulated investment pools, generally with under 100 investors. These funds invest in any asset class as well as derivative securities and use long and short positions, as well as leverage.

What distinguishes hedge funds from other investment vehicles is their routine use of long or short positions to offset “market” risks and isolate arbitrage opportunities. Although, there are riders to these strategies as these are not without their specific risks.

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January 19, 2006 in Research | Permalink