Hedge funds are proliferating, spurred by claims of better performance and higher returns in a presently dull stock market. They have attracted investors' attention especially with institutional investors increasing their allocation to funds but issues of transparency, disclosure and regulation are yet to be resolved.

The hedge fund industry is back in the limelight and this time for all the right reasons. The relative superior performance of hedge funds, at a time when markets are down and are mourning the fall of technology stocks, is what that is grabbing everyone's attention. The hedge fund industry has grown at an average 25.74 percent a year, showing a staggering growth of 648 percent in the last decade. The number of hedge funds operating the world over is around 6000 and the amount of investments is estimated to be worth $400 to $450 bn up from a mere $15 bn in 1990. Besides this, $50 bn is estimated to be in privately managed accounts within hedge funds and $100 bn more under management with other hedge funds that refuse to report to information service providers. The Trading Adviser Selection System (TASS) Asset Flows Report on the industry, compiled by TASS Research (a business unit of Tremont Advisers Inc.) and has a database of over 2000 funds and managers shows that $8.8 bn in new money poured into the funds in the fourth quarter of 2001; this alone exceeded the total flows of the previous year, which amounted to $8 bn. The reason is obviousthe average hedge fund has outperformed the market. Of course that is what hedge funds supposedly dothey generate returns independent of the movements in the market.

In a bear market, hedge funds are expected to perform better than the others and the figures prove this. While the Standard & Poor's 500 stock index dropped 13 percent in 2001 and the Dow Jones industrial average fell seven percent, the average hedge fund earned a 3.2 percent return. Historically hedge funds have shown low correlation with the market and lesser volatility with higher returns. According to Van Hedge Fund Advisors International, Inc., Nashville, USA, between 1988 and December 2000, the average US Equity Mutual Fund lost 43.8 percent and the S&P 500 lost 41.2 percent but the average US hedge fund gained 0.2 percent.

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