Hedge funds have always shared a love-hate reputation in the financial markets. In the wake of South-East Asian crisis of 1997, Mahathir Mohamad accused them of destabilizing their currency and presented them as villains of global finance.
Traditionally,
the doors of hedge funds were open only for very
wealthy investors. Of late, this appears to be
changing. One reason for this is the sudden appetite
mutual funds and other institutional investors have
developed for a piece of action of hedge fund
industry. This is how it worksmutual funds create a
fund of funds, which invests in the hedge funds, to
share the juicy returns of hedge funds that only the
super-rich investors tasted so far. This partthe share
devoted to hedge funds seems to be growing fast. All
this has turned hedge funds into a $500-$600 bn
industry. In doing so, the institutional investors
have began to expose the retail investors of their
funds to the risks of hedge fund investments
indirectly.
Hedge
funds have always operated with little regulatory
constraints. It was assumed that the kind of investors
they permit to enter, are capable of taking care of
themselves. Hence, the grant of immunity from
regulation.
However,
with increasing retail investor participation via
other funds, and a few instances of hedge fund frauds,
regulators are taking a relook at the regulatory
status of hedge funds. The regulators at both sides of
the Atlantic are presently thinking of introducing
some form of regulatory mechanism for hedge fund
industry. |
