Hedge funds: an industry in its adolescence
The dramatic increase in the number of hedge funds and the "institutionalization" of the industry over the past decade have spurred rigorous research into hedge fund performance. This research has tended to uncover more questions than answers about the dynamic and multifaceted hedge fund industry. ; This article presents a simple hedge fund business model in which fund returns are a function of three key elements -- how the funds trade, where they trade, and how the positions are financed. The article also provides methods to help investors, intermediaries, and regulators identify systemic risk factors inherent in hedge fund strategies. ; Estimating these risk factors requires having an accurate history of hedge fund performance. The authors examine recent statistics from three commercial hedge fund databases and discuss the problems with database biases that must be recognized to obtain accurate measures of returns. ; While the data show that today's hedge funds use myriad strategies that have no uniform definition, the proposed business model implies that hedge fund managers are diversifying in order to maximize the enterprise value of their firms. But this diversification does not preclude the risk of leveraged opinions converging onto the same set of bets. Preventing convergence risk will require action by investors, intermediaries, regulators, and fund managers to improve industry-level disclosure and transparency while preserving the privacy of individual hedge funds' positions.
Volume (Year): (2006)
Issue (Month): Q 4 ()
|Contact details of provider:|| Postal: 1000 Peachtree St., N.E., Atlanta, Georgia 30309|
Web page: http://www.frbatlanta.org/
More information through EDIRC
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jennifer Carpenter, 1999. "Does Option Compensation Increase Managerial Risk Appetite?," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-076, New York University, Leonard N. Stern School of Business-.
- Franklin R. Edwards, 2006. "Hedge funds and investor protection regulation," Economic Review, Federal Reserve Bank of Atlanta, issue Q 4, pages 35-48.
- William N. Goetzmann & Jonathan Ingersoll, Jr. & Stephen A. Ross, 1998.
"High Water Marks,"
NBER Working Papers
6413, National Bureau of Economic Research, Inc.
- Fung, William & Hsieh, David A, 1997. "Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 275-302.
- Jennifer N. Carpenter, 2000. "Does Option Compensation Increase Managerial Risk Appetite?," Journal of Finance, American Finance Association, vol. 55(5), pages 2311-2331, October.
- Liang, Bing, 2000. "Hedge Funds: The Living and the Dead," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(03), pages 309-326, September.
- Duarte, Jefferson & Longstaff, Francis A. & Yu, Fan, 2005. "Risk and Return in Fixed Income Arbitage: Nickels in Front of a Steamroller?," University of California at Los Angeles, Anderson Graduate School of Management qt6zx6m7fp, Anderson Graduate School of Management, UCLA.
- Jonathan B. Berk & Richard C. Green, 2002.
"Mutual Fund Flows and Performance in Rational Markets,"
FAME Research Paper Series
rp100, International Center for Financial Asset Management and Engineering.
- Jonathan B. Berk & Richard C. Green, 2004. "Mutual Fund Flows and Performance in Rational Markets," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1269-1295, December.
- Jonathan B. Berk & Richard C. Green, 2002. "Mutual Fund Flows and Performance in Rational Markets," NBER Working Papers 9275, National Bureau of Economic Research, Inc.
- Anne C Jansen & Donald J Mathieson & Barry J. Eichengreen & Laura E. Kodres & Bankim Chadha & Sunil Sharma, 1998. "Hedge Funds and Financial Market Dynamics," IMF Occasional Papers 166, International Monetary Fund.
When requesting a correction, please mention this item's handle: RePEc:fip:fedaer:y:2006:i:q4:p:1-34:n:v.91no.4. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Meredith Rector)
If references are entirely missing, you can add them using this form.