The billions adding up in hedge fund investments are approaching pre-crisis levels. In search of high returns, investors are turning once again to hedge funds and their risky approaches. However, the prosperity isn’t spread equally throughout the industry and many hedge funds are anticipated to vanish throughout the course of the year.
Hedge funds treading water
The hedge fund industry drew $22 billion from investors in March, the highest rate in over a year, according to Hedgefund.net. The hedge fund business got $2.5 trillion total currently which is 83 percent of the 2008 high. However apart from a few superstars, hundreds of hedge funds are scrambling to reach their historic peaks, the point at which they can resume collecting profits. Of the 2,500 funds that report voluntarily on their business, about 35 percent nevertheless have to get back to normal, Hedgefund.net reports. Investors are seeing a rise in funds. Nevertheless, the returns have to get to as great as they were before the crisis if the hedge funds are to charge performance fees. For example, a hedge fund managing $100 million that lost 25 percent during the meltdown must generate returns of up to 35 percent on the leftover $75 million to hit the high water mark. The fund is probably not able to return to getting 20 percent for years.
The manipulation in the hedge funds
The only way hedge funds have been able to survive is with the fees requires for management. This consists of client expenditures fees also as 2 percent of assets. Others who lost most of their client’s money simply shut down, reopen under a different name, entice new investors and start collecting performance fees. The hedge fund manipulation starts from there. There are performance territory fees the hedge funds want to put together. These are changed by the additional holdings they purchase up themselves right before the end of a quarter. They dump it all after results are recorded. This was confirmed in a study done by Swiss Finance Institute, Toulouse School of Economics, Wharton and Ohio State. More than normal, stocks with lots of hedge fund ownership do well with last-second rallies. After the manipulation, stocks with high hedge fund ownership also trended toward lower returns on the first day of the month.
The hedge fund mystique
With so several hedge funds battling to make a comeback, industry experts predict a hedge fund shake-out in 2011 as underperforming funds lose top traders to rivals and disappear from the landscape. Figures show this is already occurring all the time. In the last five years, Hedgefund.net reports, the median return of 1,400 hedge funds was 41 percent. However during that time, 3,000 hedge funds fell by the wayside. According to Brett Arends at MarketWatch, the good numbers reported by the hedge fund industry only contain a few of the survivors. There was a 10-year comparison that he did with 2,229 hedge funds starting in 2001 and the “vanilla portfolio” of his own. There was a 94 percent average on the vanilla portfolio. If the industry were to match the vanilla portfolio, it would need all the hedge funds that failed to do better. They would have all needed to get 60 percent. There were 535 survivors which one fifth did not even do well.
Information from
Market Watch
marketwatch.com/story/the-truth-about-hedge-funds-1302121763886?pagenumber=2
New York Times
dealbook.nytimes.com/2011/04/06/many-hedge-funds-still-smarting-from-the-financial-crisis/?src=dlbksb
All About Alpha
allaboutalpha.com/blog/2011/03/02/hedge-funds-and-stock-manipulation-perpetrators-accomplices-or-just-in-the-wrong-place-at-the-wrong-time-again/
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