Introduction

Abstract

Hedge funds have begun to play an important role in the global financial system. According to data by Hedge Fund Research, hedge funds managed more than 1,800 bn USD in assets in 2007. This is a significant increase compared to 38 bn. USD in 1990. Even after the large withdrawals made by investors and declining market prices during the recent financial crisis, hedge funds managed more than 1,500 bn USD in assets (end of Q3 2009). This implies that the value of assets controlled by hedge funds is approximately equal to 25% of U.S. GDP, which is similar to the amount of capital managed by the major investment banks (Adrian and Brunnermeier, 2007). Analyzing and understanding hedge funds is therefore important because they differ in several important aspects from conventional investment vehicles such as mutual funds and pension funds. In particular, hedge funds are not subject to strong regulatory restrictions and thus can freely use leverage and derivatives for their trading strategies. Moreover, hedge funds offer high-powered incentive contracts allowing them to attract the most talented portfolio managers. As a result, hedge funds can pursue a wide range of sophisticated dynamic trading strategies which enable them to generate returns in nearly all market environments. Thus, hedge funds can offer an attractive combination of risk and return and therefore seem to be an attractive new asset class from an asset management perspective. Additionally, their specific characteristics enable hedge funds to become activist shareholders who actively interfere in the investment and financing policies of portfolio firms. Hence, the growth of hedge funds might also have significant implications for corporate governance. This dissertation will investigate these issues in more detail.