Calling For "Order" On Hedge Funds

A hedge fund is an investment fund similar to mutual fund where there are a pool of funds invested in a collective manner. Hedge Fund is often structured to avoid direct regulation and charges a performance fee based on the increase of the value of the fund's assets. In the pursuit of maximum returns in today's competitive world, hedge funds has become very popular with estimation of about USD1 trillion in motion. As a hedge fund is largely unregulated, its investment manager is able to deploy a wide range of investment strategies and tactics than it could for a regulated fund, and is therefore considered to carry more risk. They often uses complex investment strategies such as short selling, futures, swaps and other derivative contracts and leverage. They will often seek to generate returns that are not closely correlated to those of the broader financial markets by hedging its investments against adverse moves in those markets.

For the purposes of consumer protection, in most countries hedge funds are prohibited from marketing to investors who are not professional investors or high net worth individuals. They therefore tend to operate in secrecy and is not required to report what they're doing. This is in fact an area of biggest concern.

Today's financial markets are filled with plenty of liquidity, despite the current US sub-prime issues that have threaten to derail global liquidity and credits. Yen carry trades have become a popular cheap source of funds, given Japan's low interest rates and stagnant or deflationary economy. Hedge fund is definitely one the major beneficiary of this source of funds to finance their investment activities. In the pursuit of greater financial returns, it is no coincidence that many of global asset classes have been driven up the roof. This includes real estate property, commodities such as palm oil and crude oil which are trading at record highs respectively! We have already seen the bubble of US housing real estate has finally burst as a result of overzealous speculation! So the big question is will others ultimately suffer the same fate as US housing? This could well happen given the following scenarios:
- US sub-prime issue continues to deteriorate to the extent of causing a collapse of consumer confidence and worst of all a US recession;
- unwinding of Yen carry trades as a result of stronger Yen or rising interest rates due to better than expected Japan's economy and/or higher inflation;
- Bubbles in emerging market's economy particularly China and to a lesser extent India. A great course of concern here is China's overheated stock market and next in line could be Hong Kong due to large inflow of money from mainland China.

Certainly, the above events may not happen as yet but there is always a possibility it may happen one day. So the big question is can something be done to regulate Hedge Funds so that further speculative damages can be prevented? Else, investors will just have to enjoy the party while it lasts!