Hedge Fund Case Study

Recently, people have different view about hedge fund. Some people think hedge fund can not only create many wealth but also benefit themselves. For instance, as Swan (2012) states ‘While the hedge fund industry has generated fabulous wealth and created many fortunes, it has done so largely for itself’. Generally, this statement is correct because the main purpose of hedge fund is making profit. Hence, this essay will discuss whether hedge fund has made benefit for itself or not, and explain how they can create abundant wealth and benefit. Hedge funds is a kind of unregulated, private pool of capital (Kambhu 2007). The managers of hedge funds institution could invest a generous assets and pursue high return through some investment strategies.

Indeed, hedge funds managers claim that they pay attention to absolute returns, generating a positive outcome to igorne the market returns. Generally, there are four useful key characteristics which could help people distinguish hedge funds form other type of money management fund (Gad 2013). Initially, investors in hedge funds are required to meet a certain net wealth so that they could invest in hedge funds. For example, an investor should have net wealth exceeding one million in hedge funds. Secondly, according to Gad (2013), he said ‘a hedge fund's investment universe is only limited by its mandate. A hedge fund can basically invest in anything - land, real estate, stocks, derivatives, currencies. Mutual funds, by contrast, have to basically stick to stocks or bonds’. Furthermore, leverage is an useful method to make more profit in hedge funds, which often use borrowed money to amplify their returns. The last characteristic is fee structure. Formal management funds always charge an expense ratio only; however, instead of one fee only, hedge funds charge not only an expense ratio but also a performance fee. Specifically, the common fee structure of hedge

Some people think the risks of hedge funds will destory the wealth they create. There are three main risks for hedge funds. First one is hedge funds managers invest riskier asstets. For instance, Amaranth made a bad bet on energy futures result in lost 35 per cent in a month. Secondly, sometimes the risk of hedge funds relate to their structure such as fraud. The most usual example of fraud is that managers lie about the nature or the value of their investment (Coggan 2009). Finally, the another worry about hedge funds is bring the system down. What this means is that hedge funds haven’t ability to repay the money they borrow when they make a bad bet. If hedge funds managers borrow money from bank, it may lead bank lost a lot of money. However, financial institutions bulid up a system which is Counterparty Credit Risk Management, so this system become the first line defense between unregulated hedge funds and regulated financial institutions (Kambhu 2007). As Kambhu (2007) said ‘In general, a financial institution may be willing to extend credit to the hedge fund against the posting of specific collateral that is valued at no less than the amount of the exposure. This reduction in settlement risk in leveraged trading increases confidence and thereby promotes active financing of leveraged trading’. As a result, this CCRM system could reduce some risks, make hedge funds safer and attract more