The name hedge funds can be confusing because it is not the case that these funds hedge with its strategies only against losses. Moreover they absorb risks and focus on misvalues of shares or markets they have identified. In this way hedge funds try to achieve high yields by using appropriate strategies in the right time. Therefore hedging can only be a part of the strategy as it secures the portfolio against risks which the hedge fund has not included. The final success of the investment of hedge funds ultimately depends on the correction of assumed misvalues. Alfred Winslow Jones was the founder of the first hedge fund in 1949 and obtained the idea to eliminate the unpredictable market trend.
Therefore he launched an investment company named “Jones Hedge Fund” which was the first hedge fund worldwide. But his invention was not in demand until 1962 when the stock market collapsed. While all shares and funds lost their value, the “Jones Hedge Fund” reached an absolute return due to the falling prices of shares. The reason for this phenomenon will be explained in the fourth chapter. Since then hedge funds became
quite popular even though the real break trough started during the
technolgy boom in the 1980’s. The total capital asset under management of hedge funds was in the beginning less than 200 million US Dollar which has been extensively growing up to 25% in average in the last 16 years. Although they have been growing a little weaker with approximately 19 % for the last six years, their asset under management is risen of approximately 1.5 billion US Dollar. So far there is no predicted end in sight. But surprisingly they represent a relative small size compared to the asset management industry. Furthermore due to the remarkable growth of hedge funds, the significance on the financial market is increasing and ensures a continued attention of public authorities and the financial community. The following chapters will show the position of hedge funds in the present time and discuss the role of hedge funds on the financial market as well as possible chances and risks.
Inhaltsverzeichnis (Table of Contents)
- The Beginning of Hedge Funds
- What are Hedge Funds?
- How do Hedge Funds work?
- The first Hedge Fund
- Classification of Hedge Funds
- Relative Value (Arbitrage Strategy)
- Event Driven
- Directional Strategy
- Quantum Fund
- Long Term Capital Management (LTCM)
- Hedge Funds in Germany
- Possible Dangers for Financial Markets through Hedge Funds
- The Risk through Leverage
- Risk for the banking section
- Positive Effect of Hedge Funds
- Conclusive Statement to Hedge Funds
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This paper provides an overview of hedge funds, their origins, how they operate, and their influence on the financial markets. It aims to analyze the unique characteristics and potential risks associated with hedge funds.- The historical development of hedge funds
- The strategies and operations of hedge funds
- The impact of hedge funds on the financial markets
- The potential dangers and risks associated with hedge funds
- The positive effects of hedge funds on the financial markets
Zusammenfassung der Kapitel (Chapter Summaries)
The first chapter introduces the concept of hedge funds, highlighting their goal of achieving high yields through strategic investments. The focus is on Alfred Winslow Jones, the founder of the first hedge fund, and the historical development of the industry. The chapter emphasizes the growing significance of hedge funds in the financial markets.
The second chapter offers a general definition of hedge funds, emphasizing their loose regulation and independence from market exposure. It discusses their unique ability to find under- or overvalued assets and the strategies they employ to profit from these market imperfections. The chapter also explains their preferred organizational structure, locations, and relationships with investors.
The third chapter delves into the operating mechanisms of hedge funds, highlighting their focus on achieving absolute returns regardless of market conditions. It explores their use of derivatives, short-selling, and leverage, acknowledging the increased risk associated with these strategies. The chapter also discusses the incentive-based compensation model for hedge fund managers and the importance of moral hazard mitigation.
The fourth chapter provides a closer look at the first hedge fund established by Alfred Winslow Jones. It explores the investment tools used, including short/long positions and leverage, and outlines how the fund generated returns, particularly during the stock market collapse in 1962.
Schlüsselwörter (Keywords)
Hedge funds, financial markets, risk management, leverage, derivatives, short-selling, absolute returns, arbitrage, event-driven, directional, investment strategies, regulation, financial supervision, moral hazard, market imperfections, institutional investors, private investors.- Quote paper
- Dennis Sauert (Author), 2007, Hedge Funds. Principles, Chances and Risks, Munich, GRIN Verlag, https://www.grin.com/document/138912
