HEDGE FUNDS

These are basically mutual funds (MFs) which invest in various securities in order to contain or hedge risks. They are investment vehicles that take big bets on a wide range of assets and specialise in sophisticated techniques of investment. They are meant to perform well in falling as well as rising markets!

Run by former bankers or traditional investment managers by setting up their own funds, they make a lot of money by charging high fees typically 2 per cent management fees besides 20 per cent of the profits out of the investment. As they are unregulated in most of the economies (for example the USA, India, specially) and risky, they accept investments from wealthy and sophisticated investors. Hedge funds made news in recent times as some of them were caught out by betting the wrong way on the market movements. Some of them also made huge losses by buying the complex packages of debt that contain many of the US mortgage loans which turned sour.

In recent years, there have been several high-profile hedge fund collapses. The Long -Term capital Management (LTCM) of the US failing in 1998 had threatened the very stability of the US financial system—looking at the level in impact the regulators managed a bail out for it to prevent an imminent financial collapse. In 2006, the world saw the collapse of another hedge fund in the US, the Amaranth which lost $6.5 billion in a month in the natural gas market (The fund in place of a bail out was closed down by the regulators

with the investors losing heavily.)