Hedge Fund managers spend endless amounts of time and money analyzing and determining the appropriate investments to hedge risk in their portfolios. Can any manager afford to disregard the risks in their business?
Originally set-up by Alfred Jones in 1949 to eliminate risk by holding long positions and short-selling other stocks, the Hedge Fund industry has mushroomed in size to an estimated $2 trillion, and over 10,000 funds.
It is projected that over 20% of the New York Stock Exchange (NYSE) volume is hedge fund related. This along with the perceived lack of transparency in hedge fund reporting has led has led some in the public media (New York Times, CNBC, etc.) to declare the hedge fund the root of all evil.
Although headlines tend to focus on the spectacular blow-ups and frauds, the tremendous turnover in the industry is due to much less dramatic reasons. Over 5,000 funds failed in 2005 alone, fizzling out quietly due to operational issues such as the miscalculation of Net Asset Value’s (NAV), or errors and mistakes.
Hedge Fund investors are paying for a fund’s investment expertise. Fund managers need to be free from worry about making honest mistakes or errors that can leave them vulnerable to personal and professional liability.