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All the attention and spotlights first donned on the hedge funds with concerns mounting in 1997 in the wake of the financial upheavals in Asia. They amplified in 1998, with allegations of large hedge fund transactions in various Asian currency markets such as those of Hong Kong SAR and Australia, and with the near collapse of a major hedge fund, Long-Term Capital Management (LTCM). However, till today hedge funds remain more elusive than ever as nothing concrete and tangible in terms have been achieved.

Meaning of Hedge Funds

An aggressively managed portfolio of investments that uses advanced investment strategies such as leverage, long, short and derivative positions in both domestic and international markets with the goal of generating high returns. Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors to keep their money in the fund for a minimum period of at least one year. They are typically organized as private partnerships and often located offshore, thus, saving on tax and regulatory issues. Also, the initial high investments and illiquid nature of funds keeps a check on the investment in hedge funds.

Diversity within the Hedge Fund Industry

For present purposes, 3 main classes of hedge funds can be identified: -

• Macro Funds, which take large unhedged positions in national markets based on top-down analysis of macroeconomic and financial conditions. These funds take position in either mature or key emerging markets. They spread their holdings across equities, bonds and currencies. Some long-established macro funds find it cheaper to use conventional forwards and futures to take positions ahead of the market moves they foresee. Some newer macro funds pursue more specialized trading strategies using complex derivative securities.

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* Contributed by -
Swetha Narayanaswamy,
M.B.A. II year (Finance),
ICFAI Business School, Mumbai.