The global market economy
The global market economy has undergone tremendous revolutions that have necessitated the contemporary society into embracing modern stratagems of doing business. Research findings indicate that reduced market uncertainties and vibrant equity performance has been obtained. Franchois-Serge Lhabitant (2004). Hedge funds performance and strategic investment ideals propagated by its managers have given it a new face that has made it a mainstream kind of investment. By the year 2001 hedge funds tremendously outran both the public and private equity markets in the United States.
Nevertheless, the free-for-all nature of hedge funds that enhances investments without analysis is a potential risk on the Wall Street market. Unlike mutual funds, hedge funds conceal their assets and the end result is that quantification of invested holdings become multifarious. Consequently, based on a derivative model embraced by hedge funds; investment is implicit in the sense that with diminutive and tangible money invested they have the audacity to create large dangles in the market.
Evidently, the highly escalated oil prices in July of 2006 for instance have pointed an accusing finger to the hedge funds in the U. S. Some of the top performing hedge funds with a minimum of $100 million under management as by September this year include Balestra Capital Partners with a global macro of 70. 66% and at the second position is Oinhan China Fund with 56. 67% in the emerging markets.
The fundamental investors in hedge funds are wealthy individuals and institutions with a great deal of funds to invest and be able to withstand imperative depressions in their portfolio as they demand for higher returns. In the United States hedge funds are unlocked to accredited investors only.
The centrality of these research findings is to determine how the integration of hedge funds has impacted the US economy and its influence on the Wall Street stock market. Peskin, M. et al (2000). Strategies: Some of the strategies employed by hedge funds include global macro investing; this one seeks out for assets that have deviated from some anticipated relationship; although this strategy under certain condition it does not involve hedging at all. Arbitrage is also a strategy used in hedge funds; this model seeks for mis-priced assets relative to global conduits of investment.
Merger arbitrage is also embraced; this is a public company’s are acquired with a target public company. Convertible arbitrage, fixed income arbitrage; between related bonds. Risk arbitrage; between related securities whose prices appear to imply different probabilities for an event. Equity market neutral among others. Since hedge funds don’t belong is a homogenous category, under a certain circumstances an investor of hedge fund can absolutely prevaricate the risks of an investment and therefore getting hold of unadulterated profit.
For instance, it is feasible for substitute traders to buy shares of say, Compaq on one exchange and concurrently sell them on another exchange, parting with clean returns. Competitive markets have however, percolated away such turnovers, divulging hedge fund managers with trades that are virtually prevaricated, at best http://useconomy. about. com/od/themarkets/f/hedge_fund_econ. htm Why Hedge Funds are Successful.
One panorama of the nature of the hedge funds industry is that this funds are virtual not synchronized, as a consequence they exhibit huge collections of evenhandedness capital, deliberate elasticity, and incredible liquidity; all this attributes enhance to trade swiftly to incarcerate value than its primary competitors. One the other hand gigantic, exceedingly, synchronized and somewhat dull mutual fund industry, speculation capital and private equity industries are demented by the mere fact that they focus on long term investments which engage in running of the companies instead of being purely investor oriented.
In a different light, while private equity money is imprisoned for 5 to 7 years in individual firms, and mutual funds is pre-commited to single strategies like emerging markets equity. With this scenario hedge funds are able to restructure models that are instantaneous and with minimal cost to shift money to where proceeds are excellent. Peskin, M. et al (2000). Hedge funds have the knack to generate significance through the so called ‘event driven’ investments. This strategy engrosses active involvement by funds in capture skirmishes, mergers, and calculated repositioning at firms.
Hedge funds are a capacity attraction for the best brightest Wall Street where elegant investment has augured advanced returns. While hedge funds are practically a small segment of the value of equity and debt markets, the funds are more vigorous traders. On any given day, hedge funds can account for 50% or more of the quantities traded on key exchanges. Since most investor employ the buying and holding stratagem as emphasized by the modern portfolio theory, hedge fund consequently buys and sells generating profits however minimal and thus making it the most strategic investment model.
http://useconomy. about. com/od/hedgefundfaq/f/hedge_subprime. htm How mortgage crisis affected the hedge funds. The underperforming tendencies of housing in United States impaired the mortgage market which greatly hampered the banking system. Since hedge funds are not as tightly regulated as funds of funds it is predictable therefore that most of hedge’s unquantified funds invested in the mortgage industry were lost due to the a sharp decline in home prices. As a result home owners could not pay the mortgage nor sell the home for a profit and consequently failed to pay.
Because hedge funds employ sophisticated derivatives, the impact of the depression was gravely magnified owing to the fact that derivatives allow hedge funds to fundamentally have access to money in form of loan to make investments, creating most advantageous profits in a good market and greater losses in a bad one. Many banks, mortgage lenders, real estate investment trusts (REIT), and hedge fund importantly endured losses as a result of mortgage payment evasions asset devaluation.
As of November 21, 2007 banks had registered sub prime-associated assets over and above U. S. $30 billion, with an augmented $8-$11billion anticipated from Citibank. Sub prime lending is essentially a collective term that refers to the practice of making loans to borrowers who do not meet up the criteria for market significance in esteem to anomalies with their credit background or capability to prove that they have adequate earnings to support the monthly recompense on the loan for which they are applying.
Lhabitant, F. S (2003). Conclusion The central dynamism about this research finding is to establish the magnanimity that elevates the hedge funds as alternative investment conduit that has transformed United States as a benchmark on the global economy. The investment conduits that proliferated the hedge funds as a major investment alternative has taken the stock market with the boomerang. Traditional models of investments such as equities, corporate bonds have been out run by the hedge funds.
Lhabitant, F. S (2003). Hedge Funds: EDHEC Business School. pg 330-349 Fung, W, and D. Hsieh (1997). The Journal of Portfolio Management; Investment Style in the Returns of CTAs; the Information Content of Perfomance Track Records: pg 121-134 Peskin, M. et al (2000). Global Equity and Derivative Markets; Quantitative strategies, why Hedge Funds Make Sense. Pg 23-35.