Hedge Fund Reader : The Debate: Will Hedge Funds Destroy the World?

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July 27, 2006

The Debate: Will Hedge Funds Destroy the World?

Recently, the US Federal Reserve raised rates and hinted that it might do so again in the near future. That resulted in a great shock for the stock markets across the globe. Besides the Wall Street, stock markets of Colombia, Turkey, Pakistan, Egypt, India and Czech Republic witnessed a major slump. The tumble of major stock markets generated a debate on hedge funds. Experts believe that the fall of the markets was due to the changes in the US policy towards hedge fund business. The US economy is still the largest in the world and changes in US interest rates affect the entire global economy.

There is an apprehension that the hedge funds will one day destroy the economies of the world. This fear is not unwarranted. Hedge funds are private investment funds that are primarily organized as limited partnerships. The $1 trillion hedge fund industry is so big that it has greater control over the financial system of the world. The recent frauds involved with hedge funds have become a major concern for the United States and other countries in the world.

Although hedge funds generate huge returns for the investors, they are risky and unpredictable. There is no doubt that hedge funds poured money into emerging markets. However, they tumbled when cost of borrowing increased. That put extra pressure on the developing economies of the world. It is difficult to predict the impact hedge funds are going to have on the global economy in future. The debate over the reliability of hedge fund industry still continues.

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July 27, 2006 in Strategy | Permalink