Pending Legislation

Defenders of the hedge fund industry correctly point out that they provide liquidity and diversification of risks. Investors in hedge funds effectively accept positions that are often difficult to “unwind” or undo because their deals frequently involved complex derivatives. These investors are willing to be “left holding the bag” when something goes wrong in exchange for higher returns, which some call as nothing more than “leveraged insurance premiums”. Critics contend that hedge funds are like unregulated and unregistered insurance firms that issue insurance policies and then “pocket” insurance premiums when all goes well. In some finance reviews, they call it as sleazy business and “outright thievery”.

Besides the collapse of LTCM, there were other high-profile and big hedge funds that imploded. Among them were Granite Fund that lost US$600 million in a single month in 1994, the Japan-focused Eifuku Master Fund that lost all its US$300 million within just a week in 2002, and the recent Amaranth Advisers Fund that lost US$6.50 billion in 2006 on a wrong bet on natural gas prices. A spectacular implosion of a hedge fund was the Manhattan Investment Fund which lost US$400 million ever since its start in 1996 and eventually ordered into receivership by the SEC to stop a massive fraud. It was run by a glib talking 28-year old college dropout who falsified fund returns showing impressive returns of 27% or more which were not detected early by third-party auditors.

With or without legislation, hedge fund investors can avail of private specialized investigations for corporate due diligence. This type of service essentially provides information from discreet investigations and secret inquiries not obtainable elsewhere. Data from these highly selective due diligence investigations and deeper level of corporate background research is meant to complement existing research data. This service is very useful to investing in hedge funds that focus on Asian companies. Many Asian firms are family-owned and decision-making processes are greatly influenced by generational relationships between parents, sons, daughters, siblings, cousins, and in-laws. In the Asian context, most boardroom dynamics are caused by conflicts among these personalities and disagreements rarely come out in public.


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