Hedge funds and their managers, once obscure enigmas of the investment community, have become in the last decade household names due to their overwhelming publicity as money-hungry madmen. Part of the reason why these loosely regulated funds have drawn so much attention is because their explosive growth in assets under management has rendered them a financial force to be fully cognizant of. Indeed, hedge funds are estimated to hold some $1.7 trillion in AUM today, and one of the biggest contributors to this growth has been the entry of major institutional investors. Since 1999, when high-net worth individuals represented some 80% of hedge funds investors, institutions such as pension funds and university endowments have made their presence felt and are now estimated to represent 50-60% of all hedge fund assets (Economist). The implications of this shift in investor base are significant and will ultimately shape the direction in which the industry goes in coming years.
[...] But we don't have to welcome share and financial-market manipulators.” A public dispute between Mahathir and Soros ensued, and the hedge fund industry was left forced to defend itself from self-righteous finger pointers. The LTCM debacle that came one year later certainly didn't help bolster hedge funds' public image. Average Americans knew that these funds not only took huge risks with borrowed money, but they had now reached a size where their instability could potentially disrupt financial markets in general. [...]
[...] Absolute Returns: The Risk Opportunities of Hedge Fund Investing. Hoboken, NJ: John Wiley & Sons, Inc Leaf, Stuart, Paul Issac and Michael Waldron. “Understanding continuing trends in hedge funds,” Evaluating and Implementing Hedge Fund Strategies. Ronald A. Lake. London: Euromoney Books pp.341-353. Lederman, Jess & Klein, Robert. Hedge Funds: Investment and Portfolio Strategies for the Institutional Investor. New York: McGraw Hill, Inc Liang, Bing. the performance of Hedge Funds.” Financial Analysts Journal Volume 55. Loomis, Carol. Jones Nobody Keeps Up Fortune. [...]
[...] This simple logic should steer headline-risk-averse institutions towards the FOF industry in the future, which could be significant considering BNY & Casey, Quirk, and Associates find that more than 50% of institutional investors they interviewed cited headline risk as one of the biggest impediments to their hedge fund investments. Once these apprehensive institutions join the game, they're most likely to start off with a FOF allocation Lack of Transparency & Regulation Interesting, the issue of transparency brings us to a much more fundamental issue that concerns the industry as a whole: regulation. [...]
[...] Hedge Fund AUM totaled $193bn in 1980, $624bn in 1985, and $7,194bn in 1990 (Ineichen), so clearly big money began to appreciate the advantages of absolute returns. The 1990s proved to be the most influential decade in the evolution of the industry. Egged on by the equity market explosion, money managers increasingly walked away from their past lives as cogs in large institutions in order to start their own funds and confirm their long- suppressed genius. The infamous John Meriwhether was among this pack, and he witnessed a tumultuous series of events that shaped the evolutionary path of the industry. [...]
[...] In Fairfax County, hedge funds represent 12 percent of the $900 million pension fund for police officers” (No. 55). Whether these capital infusions are consequences of the Pension Protection Act or not is unclear, but certainly pension funds are rushing to get their foot in the door before high- performing hedge funds close it on them. Evidence of endowment participation in the trend is also prevalent. The National Association of College and University Business Officers (NABUCO) surveyed and calculated data based on TIAA-CREF's information on 765 American and Canadian institutional participants, and their results show that college and university endowments fully kept 78 percent of their investments in either equities or fixed income in the fiscal year 2005-06. [...]
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