One of the major risks to the US and European economies lies in the fact that not only banks, who are at least regulated, but also (if not mainly) hedge funds, many of which are offshore, and practically non-regulated, are very big players in the derivatives market. There are today an estimated 10,000 hedge funds mastering among themselves more than $1 Trillion at exponential progression. With a traditional leverage ranging from 3 to 10 (depending on asset class and strategy), hedge funds are in control of something like four times the gross domestic product (GDP) of the USA.
A hedge fund can be defined as a fund whose managers receive performance related fees and freely use (based on a stated strategy) a number of leverage and non-leverage strategies, long and short positions in securities, directional hedging, market neutral approaches, and complex derivatives or other geared assets. Despite what their name implies, the strategies followed by hedge funds rarely if ever involve hedging, the main risk of hedge funds is that they repackage different types of risks which are non directional, and therefore may not be correlated to market direction.
Concerns and Risks in Hedge Funds
Regulators are concerned that some single manager hedge funds may collapse because of high-risk trading. Many of which have happened already in the past three years. The collapse of hedge funds or blow-up occurs with certain frequency in the industry. Regulator's main concern is that hedge funds are reaching out to retail investors and approaching unsophisticated investors who do not understand the risk involved in hedge funds and their trading strategies.
Another major concern is large scale leveraging as more and more hedge funds are chasing the same investment ideas and market possibilities. To stand out from their competitors, hedge fund managers are taking incresing risk in perusit of greater returns. The main disadvantage of hedge funds is their lack of transperancy and little liquidity when one wishes to exit the investment (it may take 90 to 180 days tor receive full redemption).
Numa expertise in hedge funds is extensive, we go beyond the analysis of returns and analyze trading patterns to understand the risks managers are taking, in order to assess downside risks and potential blow-ups in case of market disruptions.
Benefits of Hedge Funds
Hedge Funds are like the animal kingdom, in which you may find a tamed and safe bunny as well as seamly cute but dangerous bear. To be able to analize and disect a trading strategy of a hedge fund in order to categorize it as either a bunny or bear (the metaphor) requires sophisticated individuals with an extensive amount of experience in derivatives, securities and instruments, asset classes and a whole set of technical tools rarely found in a private banker. The value added of Numa is that they bring to the table this individual to complement the private banker which serves more as a relationship manager of the bank as opposed to a financial quantative analyst.
The hedge fund business is about achieving excellent risk-adjusted returns, not about beating the market. In other words, the hedge fund business is about absolute returns. But not all hedge funds are created equal. A poorly chosen hedge funds can produce disappointing results.
Common sense and financial theory prescribe three primary factors upon which any investment should be evaluated: prespective returns, risk, and correlation to other investments. The main advantage of investing in hedge funds are high risk-adjusted returns, diversification benefits, access to modern techniques and makets and higher flexibility to operate in any given market.
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