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     overview

This page considers hedge funds.

It covers –

• introduction
• nature - characteristics of hedge funds
• history - emergence of hedge funds as a business genre
• scale - how many funds, how big, how profitable
• issues - criticisms by regulators, politicians and investors
• studies - salient works about the hedge fund industry

The following pages looks at fund management (including questions regarding management fees, liquidity and valuation), at the history of particular funds and at hedge funds in Australia.

The note complements the more detailed examination of private equity funds and the broader guide on capital & investment. A perspective is provided by the discussion of booms, bubbles & busts and art investment funds.

     introduction

Hedge funds are capital in motion, variously praised as fuelling growth in a borderless global economy, lauded as vessels steered by far-sighted (or merely foolhardy) managers in the service of insurance and pension funds, damned as "locusts" that destroy jobs and hollow out industries, and excoriated as the shock troops of a ruthless and imperialistic Western capitalism.

Malaysian autocrat Mahathir distracted attention from domestic corruption and inefficiency by blaming hedge funds for the Asian currency crisis of the 1980s. Institutional Investor, in contrast, treated hedge fund managers as investment pin-up boys, albeit with twinges of embarrassment over the spectacular failure of funds such as LTCM and Aramanth. Regulators have recurrently fretted over whether they should (or indeed could) more closely regulate major funds and whether the impact of those funds on national or sectoral economies was as benign or malign as depicted by critics that range from Pat Buchanan to Noam Chomsky.

As the following paragraphs note, there is disagreement about the basic nature of hedge funds. In essence, a hedge fund is a pool of capital that is provided by institutional investors or wealthy individuals/families and that is deployed by a fund manager to produce substantial returns in the short term. Exploiting perceived market inefficiencies – for example through trading shares, bonds, currencies or exotic financial derivatives – may result in substantial rewards for investors and for fund managers. Some funds have boasted that they have consistently produced higher returns than the stock market, with the more fortunate investors on occasion doubling their money within a few years.

Risks, however, can be high – despite claims that trading strategies typically seek to 'hedge' against adverse outcomes so that the investor profits whether a market rises or falls – and some funds have proved to be marvelous devices for making large amounts of money disappear, whether because the managers got it wrong or because they took advantage of 'light touch' regulation by pocketing the proceeds.

In discussing private equity funds elsewhere on this site we have noted that such funds typically seek to exit from an investment (for example buying and then floating a corporation) within three to five years. Hedge funds are even less patient investors and arguably are most usefully regarded as traders, with the turnaround typically being measured in weeks, days or even hours rather than years.

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