In the autumn of 1998, the world ap peared to be doomed for hedge funds. Long-Term Capital Management (LTCM), then a popular hedge fund studded with Noble laureates, was on the verge of closure, creating the possibility of putting the global financial system in jeopardy. Although hedge funds had their beginning in 1950s, their popularity increased only in the last decade. Though LTCM was bailed under the guidance of Federal Reserve and Wall Street, it marked a dark period for hedge funds. With this, the clamor for reforms, the eagerness to understand their functioning and concern to protect investors and prevent major shocks to world economies increased. And now hedge funds are back with a bang. They are growing both in number (now totaling to an estimated 8,500 funds) and worth of total assets managed. The industry now manages assets worth well over $1 tn, compared to $50 bn in 1990. Although weak capital markets across the world over the past few years have made hedge funds an attractive investment alternative, another major reason for the recent spurt in their growth is funds of hedge funds.

Gone are the days when hedge funds were considered exclusive for high net worth investors with a risk appetite. Funds of hedge funds enable retail investors to invest in hedge funds. They are pooled investments in several hedge funds. In the US, these funds can be registered with the Securities and Exchange Commission (SEC). The registered ones can be offered to an unlimited number of investors, with a minimum investment of as low as $25,000.

Funds of hedge funds allow investors to diversify risk by spreading money across different hedge funds, different investment styles, strategies and fund managers. According to Morgan Stanley, these funds have grown at a staggering annual rate of 50% in the past three years. As per The Economist, in the same period, their share of hedge-fund assets rose from one-fifth to one-third of the total assets managed. Even traditional institutional investors
like California Public Employees’ Retirement System (CalPERS) and other pension funds are queuing up to invest in these. The reasons are pretty simple for this phenomenon. Any investor would love to invest in avenues, which make money even in falling equity markets. Hedge funds provide that opportunity. They offer investors to make money irrespective of the rise or fall of the markets. And then, traditional investment vehicles like mutual funds shun from applying high-risk strategies like using leverage and short selling, which if diligently applied can boost returns, Dr. Peter V Rajsingh, Senior Vice-President, Global Partners Group, a diversified financial services firm with principal offices
in New York and Florida, concurs, “Institutions are more and more drawn to absolute returns that are uncorrelated to
the markets and hedge funds represent the ability to generate these kinds of returns. As a consequence, the hedge fund sector is attractive and likely to be increasingly so to pension funds and other institutions.”