Chicago Tribune – Hedge funds are thought to be the wealthy investor’s Superman–funds that are able to leap tall buildings in a single bound to make investors richer, even when the stock market isacting the villain.
But are they Supermen, or mere mortals?
Academics who have peeked under the hero’s cape told an Atlanta Federal Reserve meeting on hedge-fund risk this month that despite some extraordinary funds, the average performer looks a lot morelike Clark Kent than Superman.
And since hedge funds–lightly regulated pools that often make big bets with borrowed money–have an incentive to try to take risks even if it’s too dicey, investors, the firms that lend themmillions and regulators have to be more vigilant than they’ve been in keeping an eye out for daredevils.
In this fast-growing $1 trillion arena of about 9,000 firms, experts say, the errors of a cluster of hedge funds chasing the same ill-fated investment could hurt not only investors, but the financialsystem itself. Because hedge funds often rely on huge amounts of borrowed money, if they can’t repay it, the result could be a disaster.
“Investors have a high chance of getting a failing fund,” said Atanu Saha, managing principal of Analysis Group, who co-wrote an award-winning paper, “Hedge Funds: Risk and Return,” on hedge-fundperformance with Princeton Professor Burton Malkiel.
