Hedge Funds. Principles, Chances and Risks

Essay from the year 2007 in the subject Business economics - Investment and Finance, grade: 1,0, Berlin School of Economics and Law, course: National and International Finance Relationship, language: English, abstract: The name hedge funds can be confusing because it is not the case that these funds hedge with its strategies only against losses. Moreover they absorb risks and focus on misvalues of shares or markets they have identified. In this way hedge funds try to achieve high yields by using appropriate strategies in the right time. Therefore hedging can only be a part of the strategy as it secures the portfolio against risks which the hedge fund has not included. The final success of the investment of hedge funds ultimately depends on the correction of assumed misvalues. Alfred Winslow Jones was the founder of the first hedge fund in 1949 and obtained the idea to eliminate the unpredictable market trend. Therefore he launched an investment company named “Jones Hedge Fund” which was the first hedge fund worldwide. But his invention was not in demand until 1962 when the stock market collapsed. While all shares and funds lost their value, the “Jones Hedge Fund” reached an absolute return due to the falling prices of shares. The reason for this phenomenon will be explained in the fourth chapter. Since then hedge funds became quite popular even though the real break trough started during the technolgy boom in the 1980’s. The total capital asset under management of hedge funds was in the beginning less than 200 million US Dollar which has been extensively growing up to 25% in average in the last 16 years. Although they have been growing a little weaker with approximately 19 % for the last six years, their asset under management is risen of approximately 1.5 billion US Dollar. So far there is no predicted end in sight. But surprisingly they represent a relative small size compared to the asset management industry. Furthermore due to the remarkable growth of hedge funds, the significance on the financial market is increasing and ensures a continued attention of public authorities and the financial community. The following chapters will show the position of hedge funds in the present time and discuss the role of hedge funds on the financial market as well as possible chances and risks.