Chart of the Day: Global Hedge Fund Investments

Love them or loathe them, hedge funds seem to have an aura and gravitas in financial markets, a mystique and attraction that perhaps go well beyond what they deserve. Perhaps this is because many funds have been spectacularly successful attracting enormous interest in the financial media. However, they still remain largely out of reach of the smaller investor as hedge funds are unregulated and not for the feint-hearted.

Despite the failure of several high profile hedge funds in recent months and forecasts that the boom for hedge fund activity is drawing to a close, the scale and scope of hedge funds is staggering, over $1.3 trillion has been invested in thousands of funds across the world; to put this into context there is a global investment ‘universe’ estimated to be worth $50 trillion, including currencies, bonds and equities. So more than one in every fifty dollars is now invested through a hedge fund. So-called ‘sophisticated investors’ entrust their capital to these funds, the money is pooled together and invested by the fund’s chief investment officers.

A hedge fund takes ‘financial positions’ in order to reduce the risk associated with their principal investment. These can range from equities (stocks and shares), debt (company and government bonds), commodities, currencies, and punts on merger and acquisition activity in global equity markets. Most hedge funds specialise in an area where they have expertise, and where there is a large and liquid market – liquidity means that there are plenty of buyers and sellers making it easier to trade on a frequent basis. A particular risk associated with an investment may be “hedged” through taking an opposite position. For example a company share may be hedged against market risk by “selling” the relevant stock market index or selling forward or “shorting”, other company shares that are expected to do badly.

For more on hedge funds use these links

BBC web site
Financial Times
The Times

PowerPoint Chart

Hedge_Fund_Investment.ppt

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