A Look into The World of Hedge Funds

The Economist has an interesting article in the recent print edition which takes a look into the world of hedge funds and their managers. The scene is set between USA (New York) and Britain (London) which are narrated as rivals in the battle to attract hedge fund managers and their eye-popping wealth and trade. As furthermore noted in the article the business of hedge funds stands for an ever increasing clout of the trading volume

'Whether in the New York area, or London's Mayfair, it is hard to miss the stamp of the hedge-fund manager, or “hedgies” as they like to be known in the trade. They are clever, well-travelled and mostly rich. They fill up restaurants and drive up the prices of everything from apartments to art wherever they cluster.'

'Across the world there are more than 8,000 hedge-fund managers with over $1.1 trillion in assets under management. Attracting them to any financial centre means big business. Moreover, thanks to their complex, rapid-fire trading strategies, hedge funds are increasingly punching above their considerable financial weight—some financial experts reckon they account for half the trading volume on the world's biggest exchanges.'

A new trend in financial services ... big is out, small is in.

'In both cities, hedge funds are contributing to a trend that is changing the face of financial services. Increasingly, talented financial professionals are abandoning big investment banks for small firms. Tim Spangler, a London-based lawyer with hedge-fund clients around the world, says banks are “fighting to keep talent in the building.” The rewards are a large part of the attraction of hedge funds, as is the lightly regulated environment.'

USA v Britain ... note also the different investment targets and strategies pending on you position West or East of the Atlantic.

'American fund managers say they are attracted to London as a less-crowded place where they can try different trading strategies. Data from Hedge Fund Research, a consultancy, show that in the second quarter, a share-hedging strategy involving both long and short sales was the most popular in America and Britain. But American-based managers were more likely also to trade “event-driven” strategies, based on unexpected occurrences such as takeovers. British-based funds, meanwhile, were more likely to trade in emerging markets and fixed-income.'

Oh yeah and we cannot get around this topic without speaking of regulation and also here we see differentiation between the US and Britain.

'One of the more striking differences between America and Britain is regulation. In America hedge funds are not required to register; an effort by the Securities and Exchange Commission (SEC) to impose registration by February has been struck down by a federal court.

From the British perspective, America's approach looks “bipolar”, as one London fund-manager puts it. The optimistic attitude to starting up funds—virtually anyone can create a hedge fund in America almost overnight—is followed by a legal sledgehammer when things go wrong.

(...)

Contrast this with the approach in Britain, where a surprising number of big hedge-fund managers criticise the American system for being too lax. In London, one says, requirements by the Financial Services Authority (FSA), the regulator, to start a hedge fund “are sufficiently burdensome to be useful”. In addition to requiring details on everything from the firm's compliance systems to its risk controls, there is an annual report on each firm (this applies to other financial firms, not just hedge funds).'

For me hedge funds are a bit comme ci, comme ca. I can understand what they do and I understand why, given the dynamics of the market, they can make so much money on it. But there is also a part of me which, sometimes at least, thinks that the world of finance and stock exchanges is like a madhouse where short-termism is taken to its extreme and where wealth is potentially accumulated and lost to an almost unimaginable degree. But now I am obviously getting weak, I know ... the market rules and if you can't take it then just stay out of it, but still ...

Oh, when that is said I believe that hedge funds and the market mechanisms they operate are necessary to keep an eye on because, like it or not, they play an ever larger role in today's financial markets and to that end The Economist's article linked above (free for all by the way) is a good read.