Theoretically, anybody with enough investment skills and trading experience combined with a sterling reputation for integrity and producing “extraordinary” positive returns consistently can become a hedge fund manager. The overwhelming numbers of these funds are new (new in the sense that the previous hedge fund was dissolved and a new hedge fund formed with a different name but the same manager). It is usually during market downturns that hedge funds show a tremendous increase in their new investments. Most of these come from investors who had been burned by market declines (stock prices falling across entire index) and turn to hedge funds as a haven to help protect their wealth. The hedge funds’ main attraction is their perceived ability to produce positive returns whichever way the market is going. Among hedge fund investors, the 3 most important qualities when they choose a fund manager are actual investment performance, type of investment strategy, and attitude towards risk management, in that order.
For the year 2008, an estimated US$200 billion worth of new funds will flow to hedge funds worldwide. This is slightly lower than the US$215 billion that was added in 2006 to industry assets worldwide. Compare these with the figures for years 1999 & 2000 when these funds attracted only US$50 billion annually. These figures doubled to US$100 billion annually for the years 2001 & 2002. Hedge funds as a whole is a force to reckon with in financial markets as they account for 10% of all U.S. fixed-income securities transactions and even up to 35% of all U.S. equity trades. In some of the specialty finance markets such as derivatives trading with high yields and distressed debt, their dominance is almost complete.
Surprisingly, American citizens hold only an estimated 27%-30% of this worldwide wealth although most hedge funds operate and focus on U.S. investment markets. The total hedge fund industry assets worldwide as of 2006 was estimated at around US$1.442 trillion which increased to US$ 2.783 trillion by end of 2007. Lately, total hedge fund inflows is nearly 3 times the total inflows into equity mutual funds, reflecting investors’ sentiment to make more money or to protect their growing wealth or both. The size of these hedge funds has some U.S. lawmakers worried. In a May 20, 2008 U.S. Senate hearing, lawmakers heard testimony from Michael Masters, manager of a Virgin Islands-based hedge fund. Hedge funds and other big institutional investors (such as sovereign funds, government pension funds, university endowments and private corporations’ pension funds) are partly to blame for big price surges in certain commodities such as oil by speculating in stock futures and indexes.
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