Hedge Funds and Their Role in 2008 Financial Crisis Essay

Hedge Funds and Their Role in 2008 Financial Crisis - Essay ExampleThey are non regulated in the same awareness as mutual gold. Mostly, high net worth individuals and approximately pension bloods invest in falsify property. It is not mandatory for them to be registered with the Securities and qualify Commission because they are not supposed to provide information regarding their operation and valuation in public. The paper tries to explore the early history of hedge line of descents and how prima facie they are different from mutual funds. The paper also revolve aboutes on their role and the impact they created during 2008 financial crisis and also what regulatory measures are currently in force to regulate them. Genesis of Hedge Funds Mallaby emphasizes that Alfred Winslow Jones was the first global hedge-fund manager starting his operations in 1949 with push through any formal qualification and perhaps he set the tone and style of the functioning of hedge funds that are in vogue instantly. His way of charging the performance fee was different wherein a straight 20 percent cut was made on net gains while distributing the profits. This deduction was over and above the management fee and even today most hedge-funds continue to have their performance fee policy in the same line. The fund was called so because all a massive investments were hedged simultaneously short-selling some of the weaker stocks to mitigate the systemic risks. He used leveraging as a tool to hedge investments. It is worth noting that Joness firm made an astounding issuance of around 5000% during the year 1949 through 1968. Investopedia states that in 1968, around 140 hedge funds were in operations in the US though most of them were out of business due to slump in subsequent years. The hedge funds saw renaissance in the early 1990s but again, many of them including high-profile hedge funds such as Robertsons were in trouble during dotcom crisis of 2000. Hedge Fund Is Not a Mutua l Fund Hedge funds are not mutual funds and they differ in several ways. Mutual funds have a large number of retail investors while hedge fund is not interested in a retail exposure and limit itself to a few high-net worth investors. After a minimum lock-in period, investors are slack to withdraw the funds in mutual funds but hedge funds usually have a longer lock-out period during which investors cannot withdraw their investments. A mutual fund needs to register with Security Exchange Commission while hedge fund does not have such compulsion. Mutual funds do not belowtake speculative activities and focus on returns relative to the bench-mark index. For example, if the bench-mark index goes down by 7 percent but the mutual fund investment goes down by only 4 percent then that will imply that mutual fund has performed better. In contrast, hedge funds focus on absolute returns regardless of the movement of market index. That is why hedge funds employ numerous strategies to earn high returns such as long or short positions on derivative instruments, options and futures. Mutual funds do not resort to such strategies to enhance their returns as they are governed by a host of regulatory measures (Investopedia). Role of Hedge Funds in 2008 Financial Crisis Chung argues that hedge funds were not behind the financial crisis of 2008 however, there is no vouch that they will not cause one in future. Regulatory authorities, fund managers and lawyers believe that banks and financial institutions were largely responsible for the recent financial crisis because they invested heavily in subprime mortgages. The study also revealed that short-selling done by hedge funds did not aggravate the crisis. Hedge funds are not required to be brought under the scanner of policy makers nevertheless, it is suggested that regulators need to keep a watchful eye on their activities. Accordingly, now hedge-funds firms are needed to register