Risks in Hedge Funds

Risks Related to Hedge Funds Hedge fund is a term used in investment which characterized in many ways . These characteristics provide a broad definition of what hedge fund is all about

First , hedge funds are not mutual funds .These mutual funds are limited partnerships generally with a minimum investment of at least a quarter of a minimum dollars . They are not required to register with the Securities and Exchange Commission (SEC , as long as the investors have no more than ninety-nine (99 . Hedge fund investor , however must be accredited by the

Security and Exchange Commission (SEC . As under the current law , accredited investor has at least 375 ,000 in liquidating assets and is capable of risking it

In hedge funds , there are no limits of what it may invest in or how they concentrate their holdings . For them , it is not necessary that they diversify . In some people in fact , consider their lack of regulation to be their principal advantage

The concept of hedge fund may said to be dates from about 1970 Originally , the term was generally referred to as investment funds that also used as a derivative assets such as futures and options for the purpose of hedging against market risk . In terms of the word derivatives , firms exposed to losses to changes in security prices when securities are held in investment portfolios , and they are also exposed during times when securities are being issued . In addition for this firms are exposed to risk if they use floating rate debt to finance an investment that produces a fixed income stream . Risks such of this kind can often be mitigated by using derivatives . These derivatives are securities whose value stems , or is derived from the value of other assets . Thus , options and future contracts are derivatives , because of the reason that their values depend on the prices of some underlying asset

On the other hand , hedge funds are also involved in systematic risk exposures especially from the collapse of Long Term Capital Management Systematic risk which is commonly used to describe the possibility of a series of correlated defaults among financial institutions , typically banks , that occur over a short period of time , that often caused by a single major event . The hedge fund industry is said to be have a symbiotic relationship with the banking sector , and many of these banks now operate proprietary trading units that are organized much like hedge funds . As a result , the risk exposures of the hedge fund industry may have a great material impact on the banking sector , resulting in new sources of systematic risks

In the rise of the hedge fund sector , some of its principal building block are management of credit , market and liquidity risks . Many of todays traders and investment managers are talented and experienced where they can used their skills and insights for these areas to create returns from structural and pricing inefficiences . This is one of the reason why risk management has been at the heart of the...