Hedge Fund Management Technics Research Proposal

Pages: 35 (9602 words)  ·  Style: Turabian  ·  Bibliography Sources: 0  ·  File: .docx  ·  Level: College Senior  ·  Topic: Economics

Hedge Fund Management Technique, the title for this thesis/Capstone, denotes the realm of research this study presents.



"...even the most promising hedge fund can fail."

Potential Profit "Promises"

Hedge funds "could make money [even] if stock, bond, commodity, and currency prices fell," however, as the introductory quote for this thesis/Capstone contends: "...even the most promising hedge fund can fail."

Initially, as techniques implemented were able to invest in ways that could make money even when stock, bond, commodity, and currency prices fell, the "promises" of hedge funds captivated investors' interest, who perceived hedge funds as a means to protect their money by "hedging" long-term stock investments' risks. Mutual funds' techniques, on the other hand, which invested solely in stocks and bonds, only made money only when the prices of stocks and bonds rose.

George O. Aragon and Wayne E. Ferson purport in "7 Hedge fund performance," purport that Hedge funds, in business for more than 60 years, prove similar, yet simultaneously differ from mutual funds. Like mutual funds, hedge funds, open-ended investment companies, pool dollars from a group of investors. Contrary to mutual funds, however, hedge funds do not have to comply with the Investment Company Act (U.S.).

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The U.S. Investment Company Act of 1940, albeit, required hedge fund investors to invest a significantly higher minimum investment than mutual funds. To help limit hedge funds participation and "discourage" other forms of unregulated pools to highly sophisticated individuals: "Under, certain hedge funds only may accept investments from individuals who hold at least $5 million in investments."

Nevertheless, when hedge funds bank on other exemptions under the Investment Company Act or are managed outside the U.S., hedge funds may also accept other categories of investors.

TOPIC: Research Proposal on Hedge Fund Management Technics Assignment

Hedge funds, money managers that complete extremely risky investments, are not virtually regulated. In the past, few political leaders have expressed concern about their management techniques, however, currently urgency for reform for these investments exists, as pension funds, school endowments, and charities pursuing promises of "easy money" increasingly turn to hedge funds and potentially put their funds in jeopardy. During 20076, approximately 20% of pensions invested, on average about five percent of assets (some invest more), in hedge funds. Almost two-thirds of endowments, including charitable organizations and universities, invest through hedge funds, and allocate an average of 18% of their invested assets. One New York bank study estimated that before this decade ends, institutions, including pension funds, will account for approximately one-third of new money delegated to hedge funds.

Alfred W. Jones reportedly started hedge funds in the late 1940s, however, they did not "take off" until the 1970s and 1980s, when "new investment opportunities were created in world currencies and in the futures and options markets, which opened up commodity trading and allowed leveraged investing. Investors could make big bets, magnifying their potential wins (or losses), while only putting down a little money."

During this time, George Soros, Bruce Kovner, and Julian Robertson, reported legendary commodity and currency traders, along with epic hedge fund profits, noted from 50% to 100%, made investment "news."

As traders, such as Soros, Kovner, Robertson, repeatedly made money for their investors, numerous wealthy individuals who secured their services willing gave the hedge funds traders 20% of profits, along with two percent fees. During 2005, John Makin, an American Enterprise Institute scholar and a principal at Caxton Associates, a major hedge fund, purported that during the hedge funds' first10 years, traders were "all superb risk managers."

Hedge funds operated exempt from the securities laws regulating mutual funds, reportedly due to the fact their limited clientele were extremely wealthy. Only individuals with $200,000 in income or possessing a net worth of more than $1 million were permitted to "buy in." If rich investors, deemed sophisticated enough to evaluate managers, lost money in hedge funds, neither they, nor their managers, worried much. During the 1980s, the largest hedge funds, which managed several hundred million dollars for a limited number of investors, focused on nurturing long-term relationships with their investors. As the hedge funds repeatedly succeeded, their funds significantly increased in numbers and size. By the early 1990, the largest hedge funds managed more than a billion dollars.

"Hedge funds can arrest the development of whole economies, and they have the potential to crash the financial system," Janet Bush argues in the 2006 article, "Sell-Out! Why Hedge Funds Will Destroy the World: If Hedge Funds Were a Country, it Would Be the Eighth-Biggest on the Planet. They Can Sink Whole Economies, and Have the Potential to Crash the Entire Global Financial System. Yet They Are beyond Regulation. We Should Be Very Afraid." The potential destruction hedge funds can engender almost occurred in the past. In 1998, due to the influence of the Federal government, Fourteen Families" (an apposite Mafia reference) of Wall Street (major banks) pooled enough money to complete a $3.6bn bailout for Long-Term Capital Management, a hedge fund whose investments went south. At the time, according to the federal government, LTCM's abrupt, disorderly failure posed "unacceptable risks to the American economy."

In 2006, another not successful recount of hedge funds made financial news. Brian Hunter, a then 33-year-old Canadian energy trader, who had started his own firm, reportedly raised almost $1 billion for the endeavor. Critics of Hunter pointed out he had been primarily responsible for risky natural gas investments, which during September 2006 lost more than $6 billion for his former employer, Amaranth Advisors. Hunter's investments, reported caused Amaranth Advisors, one of the largest hedge funds (which he joined in 2004) to collapse.

As a result, the San Diego County pension filed a suit against Hunter for $150 million of the $175 million they invested with Amaranth, contending Hunter failed to deliver the diversified and risk-controlled investment strategy he promised. In addition, in regard to Hunter's investments, a Senate committee investigated manipulation of the natural gas futures market related to Hunter's investments. Prior to this particular hedge fund fiasco, Hunter's investment strategies were entangled in lawsuits filed by Deutsche Bank, his former employer. As hedge funds operate in the shadows, some contend, and are subject to only scant regulation of their investments, as well as information they share with investors, little keeps Hunter or other questionable traders from repeatedly recklessly investing other people's money.

Along with fulfilling and failing to fulfill promises of profits for investors in the past, research conducted by hedge funds helped expose corporate corruption, such as the notorious Enron case. In light of the myriad of current conflicting complementary, yet simultaneous challenging information enveloping hedge funds, while continually captivating personal and public interest, this researcher contends hedge funds to merit a scrupulous analysis to fulfill the thesis/Capstone required to partially fulfill the requirements for the Degree of ***.

1.2: Study Area

This thesis/Capstone, which analyzes techniques hedge funds utilise, contends that despite the fact promising hedge funds may fail, investors utilising hedge fund management techniques, in fact, may "profit" from both rising and falling markets.

Questions contributing to confirming this study's thesis statement include:

1. What are hedge funds?

2. How do hedge funds compare to mutual funds?

3. What techniques do hedge funds utilise?

4. How do rising and falling markets impact hedge funds?

In this area, need to clarify "area" and/or region this thesis/Capstone encompasses.

1.3: This Study's Significance

This thesis/Capstone, analyzing techniques hedge funds utilise, proves significant as it highlights a contemporary controversial concern in the investment arena. During the course of this research effort, this researcher aims to return an increase in the readers' understanding of the techniques hedge funds utilise.

As hedge funds are not limited to one particular geographical region, this thesis/Capstone does not focus on any one particular country. Instead, it analyzes hedge funds techniques in the global financial arena.

1.4: Subsequent Sections/Research Method

For this thesis/Capstone, this researcher coheres to a traditional, fundamental thesis/Capstone framework, as this provides the best structure to present this study's points, while simultaneously meeting the academic criteria requirements mandated for partial degree fulfillment. This study's platform incorporates the following sections:


1.1: Study Background: This section presents primary points relating to hedge funds/techniques.

1.2: Study Area: This segment advises that hedge funds/techniques are not unique to any one particular global.

1.3: This Study's Significance: This researcher notes that hedge funds/techniques comprise a significant, contemporary controversial concern.

1.4: Study Structure: This segment presents an outline of this study's subsequent sections.

1.5: Aim and Objectives: This section portrays this study's aim, as well as, a bulleted list of the objectives for this thesis/Capstone project.


2.1: Introduction: In this segment, this researcher introduces information relating to hedge funds techniques, and notes that the Literature Research Methodology constitutes the method utilized for this thesis/Capstone. Themes explored by the literature are related in this segment.

2.2: Study Method: This section briefly spotlights the Literature Review Methodology, noting that this researcher initially assesses more than 40 sources to, in the end; utilize 20 sources as relevant enough to… [END OF PREVIEW] . . . READ MORE

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