[Hedge funds-risktakers or Gambers]

by

Acknowledgement

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.

DECLARATION

I, [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

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Table of Contents

Contents

CHAPTER 1: INTRODUCTION1

Introduction1

Research question2

Significance of the Study2

Aims and objectives of the study3

CHAPTER 2: LITERATURE REVIEW4

Definition, Origin And General Characteristics Of Hedge Funds6

Specific characteristics of hedge funds8

The Transparency of Investment Policies and Regulations9

CHAPTER 3: METHODOLOGY17

Research methodology17

Research approach17

Data collection methods17

Data analysis and interpretation17

CHAPTER 4: DISCUSSION AND ANALYSIS19

Overview19

Development of Hedge Funds20

Current Industry Performance21

Key External Drivers Affecting Hedge Funds23

Cons and Pros of Hedge Funds25

Driver for the Stock Markets: Speculation, Hedging and Arbitrage27

Liquidity risk29

Growth of hedge funds31

Hedge Funds and Riskiness34

Supervision of the transfer credit risk36

Have they always been so successful and what is their validity?44

Also what we predict for the future?46

Will hedge funds continue to be so attractive?50

CHAPTER 5: RESULTS54

REFERENCES55

CHAPTER 1: INTRODUCTION

Introduction

The last three decades have witnessed two most significant evolutions in global financial markets. First evolution has occurred in the areas of managing large amounts of capital, which has been now handed over to agents, like hedge funds. These agents are subject to very less number of trading restrictions and need to disclose much little about the strategies that they use in trading. Moreover, as a result of this entrustment on agents, investors today have to rely mainly on the history of realized returns to evaluate future performance in order to allocate their funds across such mediums. Secondly, it is now possible to combine and slice a large variety of risks because of a rapid pace of financial innovation, and by trading a rich set of financial instruments (Levinson, 2010, pp. 37).

However, these two major evolutions have also created room for a particular type of agency problem. This has resulted in allowing those managers who run out of genuine arbitrage opportunities to take secret exposure to unusual or exotic risk factors or get involved in gambling for the purpose of improving their reputation temporarily. In this regard, numerous strategies that aims to generate small but frequent positive returns, and minimize the probability of experiencing very large and huge losses are becoming increasingly appealing because of the reason that they disguise luck as skill. The spectacular collapse of Amaranth, LTCM, and numerous other large hedge funds have left a number of investors with nothing, and conveyed the message that this kind of shifting in risk is at play. In addition to this, most of the observers argue that following the recent global financial crisis, these kinds of obstinate incentives led to numerous inefficient and excessive risks taking by hedge funds and other financial institutions, and resulted in giving this financial system a form of gambling (Risk magazine, 2002, ...