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Hedge Funds Regroup and Play a Major Role in Financial Products Including Derivatives, Lending and Insurance, Business and Industry Trends Analysis

There are approximately 10,000 hedge funds worldwide, according to analysts at HFR, but the number is not static.  Instead, some funds close up shop due to poor returns on investment, while new funds open.  In the third quarter of 2022, hedge funds held total assets of about $4.71 trillion according to BarclayHedge.
Hedge funds are investment pools for institutional investors and wealthy individuals.  A hedge fund is a private investment fund that may utilize aggressive strategies such as selling shares short, leveraging via heavy borrowing and/or the timing of trading via very sophisticated computer models, arbitrage or derivatives.  Generally, hedge funds may use strategies that are not available to more regulated mutual funds.  (A small number of hedge funds in various nations have issued publicly held shares, or have set very low minimum investment requirements, but this is the exception rather than the rule.)
In addition to hefty fees (often 1% to 2% of assets plus 0.4% to 0.6% in administrative fees), hedge fund managers typically receive a 20% cut of any profits.  In many cases the investments within a fund may be in privately held companies or in other assets that are not commonly traded on exchanges.  This means that valuing the assets can be arbitrary.  The higher the asset value claimed by a fund’s manager, the higher the fees that the manager receives.  In a typical year, at least a few hedge fund managers will deploy extremely effective strategies for current market conditions, to the extent that investors will earn vast returns and the managers will earn hundreds of millions of dollars in fees.  Nonetheless, there is no magic in this business, and funds have been known to post stunning losses.  Results always vary widely from fund to fund, and the entire industry has posted poor results from time to time.  As a result of a general pullback by investors in the financial crisis, when many hedge funds lost vast amounts of their clients’ money, some funds have lowered their fees and begun more transparency in their reports to clients.
Pension funds, foundations, endowments and retirement funds are frequent hedge fund investors, as are wealthy individuals.  Many of these investors are quick to move their money when investments prove to be disappointing.
Hedge funds have become so prominent that they create a considerable portion of commissions earned by stockbrokers.  The funds play a major role in trading in markets such as convertible bonds, credit insurance derivatives and securitized debt obligations.  Meanwhile, swaps and derivatives are enabling hedge funds to use leverage creatively to enhance returns.  When the funds make good bets on the direction of the assets they purchase, that leverage boosts returns.  Unfortunately, that leverage can also exaggerate losses.
In addition, hedge funds are seeking increasingly diverse and creative ways to earn high returns.  In fact, the lines between hedge funds and their financial industry competitors, such as investment banks and private equity firms, are starting to blur.  For example, some funds are making medium- to high-risk loans to companies, thereby taking over the role traditionally played by commercial banks.  Other funds are backing major insurance risks such as potential loss to hurricanes, effectively taking on a role traditionally played by reinsurance companies.  Another option for hedge fund managers is investing in commodities, even to the extent of backing oil and gas exploration, development and reserves acquisition.  Moreover, hedge funds are backing corporate mergers, acquisitions and leveraged buyouts, traditionally handled by commercial banks, investment banks and private equity companies.
Hedge Funds take risks that can lead to significant losses as well as strong gains.  Historically, hedge funds were largely unregulated.  However, a sweeping U.S. reform bill, the Dodd-Frank Wall Street Reform and Consumer Protection Act, was signed into law after European finance ministers approved similar regulations.  The act is having a broad effect on the investment industry.  Large private equity companies and hedge funds (but not venture capital companies) are required to register with regulators as investment advisors and make their books available for scrutiny.  While the funds are aimed primarily at institutions and wealthy investors, many variations occur around the globe, and a handful have sold shares to the public via IPOs.
Dodd-Frank regulations were partly responsible for banks cutting back on some types of business lending.  Hedge funds have an opportunity to fill the gap.  Meanwhile, bank lending to large corporations was soaring, with borrowers taking advantage of record low interest rates. 

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