Abstract
This chapter provides an overview of the characteristics of hedge funds and the academic literature on them. By limiting their investors and their marketing efforts, hedge funds are exempt from most of the major securities acts adopted by the United States over the past 75 years. Because disclosures by hedge funds are voluntary, there exist serious challenges to those who analyze hedge fund performance results and trading strategies. Some of the interesting findings about these funds are as follows: (1) Many hedge funds undertake significantly more aggressive/risky trading strategies than those adopted by other investment companies; (2) the contingent incentive fee structure employed by hedge funds can lead to significantly more income for their managers than managers of other investment companies per dollar of performance; (3) the after-fee performance of hedge funds does not appear to be significantly different from that of other investment companies; and (4) there is no conclusive evidence that hedge funds have exacerbated (or caused) any of the significant worldwide financial crises during the past 25 years.
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- 1.
As stated by Franklin Edwards in his seminal work “Hedge Funds and the Collapse of Long-Term Capital Management”: “It is hard to imagine a greater misnomer than ‘hedge fund,’ since hedge funds typically do just the opposite of what their name implies: they speculate.” Nonetheless, many hedge funds are not as leveraged as other financial institutions, as evidenced by the Report of the President’s Working Group on Financial Markets concerning Long-Term Capital Management in which they state, “This issue [leverage] is not limited to hedge funds; other financial institutions are often larger and more highly leveraged than most hedge funds.”
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Anderson, S.C., Born, J.A., Schnusenberg, O. (2010). Hedge Funds: Issues and Studies. In: Closed-End Funds, Exchange-Traded Funds, and Hedge Funds. Innovations in Financial Markets and Institutions, vol 18. Springer, Boston, MA. https://doi.org/10.1007/978-1-4419-0168-2_6
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DOI: https://doi.org/10.1007/978-1-4419-0168-2_6
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Publisher Name: Springer, Boston, MA
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