Hedge Funds Essay Example | Topics and Well Written Essays - 1000 words

Hedge Funds - Essay Example Most of the hedge funds are devised in such a manner that they are able to generate return for the investors with the rate of return that is generally more than the market return and even in times when the market is not performing well due to recession or some other reason. However, a retail investor cannot invest in the hedge fund the same way as he would have done it for stocks or mutual funds. The operations of these funds fall beyond the control of any government regulation and hence it is mainly at the fund manager’s discretion that the investment portfolio would be designed, what strategies would be employed and which stocks are to be included. The main motive behind devising such a fund was to secure the funds from the market risk and to earn more return. Hedge Fund Management and Skill The management of this kind of investment product requires a lot of skill. The fund managers need to have an insight about the market and the various risk management strategies that can help the managers to cover the fund against probable losses and gain profits out of those risky situations. The managers and the investors of these kinds of funds need to be aware of the types of investment risks that they may come across. Since higher the risk taken higher is the possibility of return, the hedge funds often attempt at taking risks that may not be beneficial for the investors. The capabilities and expertise of management of the hedge funds cannot be determined from their past performances because there are a lot of fluctuations in the way the hedge funds tend to perform. If an investor tries to invest in a fund looking at the past performance he might face a lot of challenges because the fund may not perform as before. Hedge Funds and Luck Often the investors of a hedge fund are confused between luck and skill. The common people think that a particular fund performed well because of the efficiency of the manager. But it is not always the case. It might happen becaus e of good luck as well. Most of the hedge funds do not encounter any kind of restrictions and hence their portfolios are not very diversified. For any risk averse individual it is highly risky to invest because the direction in which the market moves may not favour that particular fund. These kinds of funds often result in a mixed performance which may not be favourable for the investors in the long run. Hence, though the skill level of the managers is extremely important for prediction of the market and for choosing the correct investment avenue, the investors cannot rely on the intuition of the fund managers or their past performance solely. There is a luck factor and there should be a certain level of control of expectations on part of the investors because the markets may change its colour due to any kind of unprecedented event and hence may expose them to a risky situation. Hedge Funds and Insider Trading The agency theory is often applicable in case of hedge funds where the fu nd managers act as the agents of the investors. In most cases there exists an information asymmetry between the investors and the managers and the latter take this advantage for deriving undue profit from the market. Since Hedge Funds, are privately owned, they do not fall under the jurisdiction of any rigid regulatory framework. Thus the disclosure requirements of this fund are also less. Thus there may be problems of insider trading in case of hedge funds. The phenomenon of insider trading takes place when a fund manager makes use of any price