Risk Management in Hedge Funds Dissertation

Pages: 60 (19188 words)  ·  Bibliography Sources: 40  ·  File: .docx  ·  Level: Doctorate  ·  Topic: Economics

To become shrewd to reach total reappearance of the location instructions of hedge funds which are less controlled than those of mutual funds. Ever since hedge funds are less controlled likened to mutual funds, this stresses that the hedge fund directors own superior info that about the marketplace and the obtainable advantage lessons than the even fund directors (Cottier, 2000). Because of the assignments instructions being freer, the hedge funds will be more reliant on a liquid market, where both buyers and sellars that are ready to purchase and sell at fair market value (Ineichen,2003).

Figure 2: Kinds of investment vehicles are investors looking at.

The hedge fund business began to rise in sometime around the mid-sixties when Fortune magazine tinted this new financial vehicle which outdid every current mutual fund on the market, occasionally by as much as 90% that took place in the last decade. Therefore the hedge fund manufacturing was here to stay (Ineichen, 2003). After the article started to became recognized a lot of persons that around the world had been trying to copy what Jones had been doing and in the end of the seventies there were over 150 hedge funds that were functioning in the marketplace (Cottier, 2000). On the other hand, the new hedge fund executives were very untested, and therefore the prosperous of hedge funds had followed in huge mortalities and many insolvencies because of poor management, which made the market silent for an amount of years.

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With an article in the Institutional Investor magazine concerning the unresolved presentation of Julian Robertson's Tiger fund, the populace's consideration was yet again seized and numerous stockholders that were rushing into the business again which now obtainable thousands of choices to capitalize your capital in (Cottier, 2000). In the previous 1990s numerous well-known money managers unrestrained the traditional reserves to be capable to try their probabilities as hedge fund managers. Unhappily, likewise to what had taken place in the sixties, the market was unsuccessful again in the late 1990s sending off a lot of people to become bankrupt.

Figure 3: Hedge Fund Net Buys

Dissertation on Risk Management in Hedge Funds Assignment

On account of the attention in media concerning the failures of some of the hedge reserves in the last decade, a shift in the direction of more rule concerning the hedge fund business has occurred (McWhinney, 2010). In America, President Obama contracted the Private Fund Investment Adviser Act of 2010 in July 2010, therefore importantly altering the guidelines regarding the recording necessities for fund managers. The result of this act is that it has become a whole lot harder than ever to evade registering with the SEC which was meaningfully calmer before (Hedgecock & Loving, 2011).

These days, the common type of hedge funds is a restricted partnership or a partial obligation business, which can issue safeties in "private offerings." Unlike mutual funds, hedge funds are exempted from the Investment Company Act of 1940, which regulates the structure and operation of mutual funds and requires funds to safeguard their portfolio securities, forward price their securities, and keep detailed books and records. This exemption provides hedge funds a great flexibility to select investment options. They can use short selling, leverage, derivatives, and highly concentrated investment positions to enhance their risk/returns. Hedge funds are also exempted from Securities Exchange Act of 1934; therefore they are not required to make periodic reports to SEC. The flexibility also has its own cost. Hedge funds have to limit the number of investors to 500 to qualify for exclusion from the regulations governing public issuance of securities. In addition, hedge fund investors must meet certain requirements. For instance, a qualified investor must have a minimum net worth of U.S.$1,000,000 or, alternatively, a minimum income of U.S.$200,000 in each of the last two years and a reasonable expectation of reaching the same income level in the current year. Hedge funds are not allowed to advertise in public. Due to this restriction, hedge funds report voluntarily to database vendors so that they can distribute the information and attract investors' dollars. However, they may stop reporting if they perform poorly. Alternatively, they may also? stop reporting if they perform remarkably well and thus are closed to new investors. This typically creates a survivorship bias in measuring fund performance.

Figure 4: The Return Performance

Since hedge funds usually report their returns on a voluntary basis, it is not possible to accurately estimate the size of the hedge fund universe as well as to verify hedge funds' returns. Collecting reliable information on hedge funds is a challenge, but according to an estimation of Van Hedge Fund Advisors, the hedge fund industry has been growing at an average rate of over 17% per annum over the last decade and is expected to continue at this significant rate. There were about 9,000 hedge funds operating in 2006 with a total assets value of USD 1.3 trillion.

1.2 Problem discussion

Risk management has always been a topic that has been complex, particularly when it comes down to the hedge fund manufacturing. Since hedge funds are able to apply many diverse forms of financial devices, it is very hard to discover a sole Risk management approach that goes healthy with hedge funds. Although the industry has ben certainly growing fast over the last several years, there has not been much focus that has been put on how risk management should be done. The hedge fund manufacturing is a moderately new topic in Britain, where the first hedge fund was founded not more than 15 years ago. Because of this, not much investigation regarding the British hedge fund business and its risk management strategies has been actually been executed. Therefore, we discover it a stimulating theme to focus this thesis on.

Figure 5: Analysis of Hedge funds

From the time when hedge fund portfolios are built in a similar method as mutual funds, the risk management that is being implemented would need to be specifically important during this procedure when it comes to hedge funds. Therefore, we wish to find out if the fund managers are taking this into consideration when putting together their hedge funds. Another stimulating topic is to explore which one of the risk variables the fund managers' are utilizing, because a lot of researchers query their strength.

We desire to study what position risk management at the moment have in the Swedish hedge fund business from a fund manager point-of-view, as well as if these views differ in view of the size of the hedge fund.

1.3 Purpose

The purpose of this dissertation is to be able increase the information of how Englis hedge fund managers are observing and managing various forms of risk and how they construct their portfolios with respects to risk management. This study also sets out to investigate how the risk sizes are utilized when it comes to risk management and how legal they are when directed to hedge funds.

1.3.1 Problem definition

This dissertation purposes to increase the awareness regarding how risk management is performed in hedge funds. From the above issue discussion the research questions can be expressed as:

How do British hedge fund managers observe risk in their portfolios and how are they able to manage it? How do fund managers put together their portfolios with respects to risk management?

How is risk measurement utilized when it comes to risk management and how practical are they when they are being applied to hedge funds?

1.4 Limitations

To thin out the field of study the study will put a focus on hedge funds that are being operated from Britain but who are not restricted to trade in properties and merchandises traded completely on the market. This is done in order to capture the views and mindsets on risk and plan of contributors in the market deprived of discounting global risks for instance those born from money trading and macro cost-effective changes. This will also grow the hedge fund manager's aptitude to expand the portfolio, which should be an significant factor in the policy of the portfolio.

1.5 Perspective

This dissertation is written from a perspective of a fund manager, managers being persons who accomplish the different hedge funds. This dissertation will be interesting for those that are funding managers who request to upturn their knowledge regarding risk management and how precise the diverse risk quantities seize the risk when it comes down to hedge funds. It will also give an escalation in the information for individuals who request to capitalize or is presently capitalizing in hedge funds, as it will make them much more conscious of the complication of the hedge fund manufacturing. Therefore the rank for hedge fund directors to pay a well-reputable risk management strategy will be examined.

Introduction Chapter One



Even though the media and so many other investors have been perceiving hedge funds to be consistently risky, the evidences are that little about the hedge fund universe is the same. Some hedge… [END OF PREVIEW] . . . READ MORE

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