Hedge Funds Advantages And Disadvantages

Chapter 1 – Design of the Study

1.1 Introduction

While gold or treasury bills or other securities have always been an investor favourite, in recent times, a new “alternative asset class” has grown in prominence which appeals to investors in the form of higher and stable returns. In the realm of investments, this rising phenomena is known as hedge funds and is increasingly sought after by investors. Hedge funds have grown in size and increasingly play a paramount role in a number of economies around the world, their stock markets and the multitude of companies in which they invest.

Hedge funds can be defined as largely unregulated private pools of capital whose fund managers can invest in a broad array of assets and make use of many investment strategies, such as activist investing, global macro, market neutral equity, foreign

The most important is the fund manager who includes a group of individuals, sometimes working as a limited liability partnership. These individuals usually have considerable experience in the field of investments which ensures them to enjoy credibility with the investing community. Typically a fund charges 1 to 2 per cent of the assets under management as fee, would additionally be entitled to a bonus of about 20 per cent from the earnings. It must however be pointed out that such figures and vary from one hedge fund to another. The advent of a loss would mean no bonus for the fund which provides an impetus for fund managers to provide returns. The second important pillar is the prime broker, which is a usually a large investment bank. Such services include settlements, security and money lending, acting as counterparty to derivative transactions amongst many others. The prime broker is paid a fee for the services rendered. The third pillar is the fund administrator who is paid a fee and performs tasks like accounting, valuations and other back office