September 09, 2006
No More Roar, Only Purr
Title’s confusing? Well think of evolution. We all admire the lion, but we prefer to have cats as pets because they are not only beautiful but also manageable. It’s the same with hedge funds. Over the decades, they’ve been domesticated to suit the requirements of the investors. As the hedge fund industry has grown into a trillion-dollar industry in the past few years, it has become the focus of increased attention both from investors and regulators. Most investors believe that hedge funds are their ticket to high returns and this belief has led just about everyone to jump onto the hedge fund bandwagon.
Of course, everyone wants to invest in a hedge fund once they are convinced that the term is synonymous with 25 percent-plus annual returns. But they don’t want the risks associated with such high stakes – if you win big you also lose big. How many investors have actually asked themselves what makes hedge funds so special? Are the high returns on investment due to certain techniques, mode of investment or is it something else. I’m sure most investors are just too happy earning their high ROIs to bother about modes and methods. But to understand how the high returns come, it is important to understand hedge funds.
One of the biggest misconceptions about hedge funds is that it can provide high returns on the invested amount. Yes, the rate of return is quite good when you compare it with mutual funds. However the ability of hedge funds to generate high returns diminishes as with larger asset holdings get larger. Also, there is an increased need among investors to protect their holdings. So they still want the returns, but don’t want to play too dangerous. See how the lion slowly transmogrifies into a kitten!
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