Hedge Fund Straight Talk
Hedge Fund Straight Talk QuestionMany people are starting to ask why hedge funds are still called hedge funds if they sometimes appear to be banks, private trading groups or private equity firms. I think the name will stick around but here's an article arguing that it should be done away with:
It is time to lay hedge funds to rest. Not the vehicles themselves, that is, but the name.
Hedge funds get blamed for all manner of ills, including the current crisis in financial markets. They are a convenient scapegoat – partly through their own determination to cloak their activities in secrecy and operate in a kind of nether world that few people outside select financial circles are privy to or understand.
They may have contributed to the crisis, although they undoubtedly did not cause it. And they were definitely playing the leverage game that has been a big part of the problem, making use of cheap credit to gear returns. But the real point is that the way hedge funds seek to make money is fast becoming the preferred investment approach for mainstream investors.
There has been talk of convergence between the hedge fund industry and traditional asset management for some time. Many traditional managers now run their own hedge funds or have loosened the constraints on mutual fund managers so they can use some of the same tools as hedge funds. Hedge fund managers, meanwhile, have made inroads into the institutional investor landscape and widened their range too.
But some industry practitioners argue there is still a fundamental difference of approach in terms of investment philosophy and risk management. Hedge fund managers are active managers of risk, while the traditional industry manages risk relative to a benchmark, leaving it fully exposed to boom and bust cycles. That is largely the difference between absolute return and relative return investment approaches. Read more...