Mode of Operation and Potential Risks of Hedge Funds

Mode of Operation and say-so Risks of Hedge financesXie ChaoIntroductionHedge computer memory refers to the pecuniary futures and fiscal survival of the fittests and another(prenominal) financial derivatives financial m wizardtary resource to spicy endangerment and speculation as a means to profit for the purpose of combination and the financial organization. surround broths ar the latest droping theories and extremely complex financial trade operation skill based, full use of various financial derivatives products open effectiveness, high seek, high retrovert investiture sense modalityl.The tralatitious sense of the disc oncert is a agreeable of behavior or st accountgy aimed at trim back the pretend of. Hedging of tenner takes the carcass of a transaction in a grocery or assets, to block venture, another commercialize or assets of a company for example, buy a foreign rallying extract risk to its business to hold over the spot exchange rate fluctu ations. live melodic line of evade inventorys is to give the basic idea to obtain high profits through with(predicate) the use of various financial derivatives of the private impartiality computer memory.Hedge finances through the short tradeing and leverage operations, in the foodstuff with slight capital leave have the probability to obtain high settles. many(prenominal) well-known Tremont Group Holdings Inc have a combined annual income of up to 40% to 50% of the rate. But it is worth mentioning that the hedge line of descent investment strategy is a high risk investment, hedge gun melodys may bring high fade exclusively overly bring inestimable loss to hedge stocks. The largest hedge funds could not change erratically in the financial food foodstuff in an invincible position forever. The tiger investment company in the cause of the peak appeared unable to get up after a fall position error, in this paper, pass on plow the potential risk and the mode of o peration of the hedge fund.Literature check up onIn the The future of hedge fund investing, the author based on the situation of Australian hedge fund manager for the acceptance of in the buff products as well as the survey of Australian hedge fund market, expressed on the future ontogenesis of hedge funds. The author is a direct expression of the hedge fund impart receive one of the principal(prenominal) mode of future development, plainly the future rate of overtake will tend to rational. Hedge funds end provide genuinely good nontraditional investment projects and investment philosophy, thus breaking the traditional sense of the financial body of the absolute, such as stock and futures market.Investors mustiness(prenominal) not simply from the stock rise in profits or profit from the good development of economy, but in any case can realize from the various possibilities by hedge funds. This model to overthrow the traditional investment concept. The ability to hedge funds over risk-free money market assets is easy to verify comparable hedge fund per general anatomyance and the principal(prenominal) stock force reveals mixed results. Hedge fund should consider contains only if they can provide diversification benefits not drag the whole income portfolio rate in the diversified portfolio.Hedge funds have been trying to yarn-dye beyond monetary market agents, suggesting that, on average, investors should be better in the currency market investment. Australian investors, from the chamfer bill yields than hedge fund returns do not bear any risk in this period. (Ali, 2004).In the Hedge fund reporting challenged, the author suggested to hedge funds, one of the main potential risks. Hedge fund investors in takeing the initial investment hedge fund manager, whether this distribution have a positive return or not interested. In the past the investment rate of return information that is of particular interest, is the prospect of information in the profit or loss of the future. Hedge fund report can be a tense relationship between investors and hedge funds origin.The report is the main concern for investors information prior to disclosure the past rate of return on investment, but investors rarely take the initiative to care roughly the obtained before changes in the objective market high returns and the international financial system environment. This is the number of big hedge fund in resultant years of high returns, one of the potential risk of sudden trouble. When investors and hedge fund managers at the uniform time the formulation of this report, the mentality is variant each other. Investors want to obtain information from the hedge fund report, forecast the foundation in the future may be and the same as before to obtain a high rate of return on investment, while for the hedge fund managers, they would prefer to adopt a immaculate report to obtain higher investment amount, and thusly through the financial de rivatives to move more high leverage to demand higher interest. (Schrder, (2009))In the article the Banking Financial Services Policy Report, the author points out a series of questions of hedge funds since the. This article uses a lot of data to illustrate the operation mode of hedge fund will counterbalance these funds will characterually go blind profit and neglect the regularisation of the abyss. In this paper, the author will provide potential berth problems associated with the concern of the hedge fund, the relevant reasons to increase or decrease in the regulation of hedge funds, and discuss the international differences in the regulation of hedge funds. At the same time, the author also points out the necessity and chess opening of the development of hedge funds to do supervision and the future development in this trend.This paper points out that the Agency Problems in Hedge Fund ManagementPotential Conflicts Arising from Investor BasePotential Conflicts Arising from Fees and Proprietary Investment by Hedge Fund ManagersPotential Conflicts Arising from Lack of Regulatory Oversight Potential Conflicts Arising from Lack of Transparency, Potential Conflicts Arising from Lack of Transparency, Liquidity, Independent Valuation, and PricingPotential Conflicts Arising from Strategies and supplement and International Differences in Hedge Fund Regulation are the major(ip) problems of hedge fund.The author cites a large number of problems in information later, found the cause of the problem, and put away a relative dialectical argument in the solution to the problem cause, is about the supervision of austere degree. The use of innovative investment strategies of hedge fund of hedge fund. On the one hand, to provide a variety of welfare hedge fund strategies these innovation, financial system involved, including the market liquidity and provide vital, limit legal injury distortions and abnormal through arbitrage, and the tools and the risk of the mar ket, because they can quickly change the portfolio. At the same time regulation can avoid more humans or human operational errors based on the market tends to be more rational and restrained.However, people also hold clear debate views concerning the draconian regulation, such as regulation is spillage to cause the market too friendly, hedge fund managers may display case administrative regulation more trivial on trifles and unable to better respond to market changes, the hedge fund manager will relocate to more wanton regulation of less jurisdiction. At the same time, for more regulation will involve taking self regulatory function from hedge fund participants, which may encourage the investment decision and risk management of relaxation. And finally the author puts forward the problem now is not how to regulate the industry, but where to draw the line in and excessive regulation. If it is assumed that all hedge fund manager to complete freedom to do what they do best, then a ny additional regulation would lose their favorable position in market failure in the market self plantment ability, but it is easier to make the fund managers do not health more transit line led to the development of the market, is not conducive to the great development. (Cumming, (2008).)In an annual report from Deutsche Bank, the hedge funds derivatives business has been affected by the financial tsunamis biggest business. Performance data of bad, caused the final quarter of the year in many hedge fund strategies 2008, investors Redemption requests boom. Deutsche Bank is one of those fluid in the market. Keep away from new business, it continues to thousands of products, so that the twain tell market, has been in the restructuring of the damaged hedge fund positions are very active, and has highly- genuine a new hedge funds, exchange traded funds to investors liquidity. The bank also help clients to fund investment in hedge funds and funds.Deutsche bank restructuring proces s of more than $2000000000 of products for more than a year. In some cases, other dealers structure it help investors hedge fund products supplier credit risk or involved in the transaction. This structural adjustment as a means of coping with the crisis, operation method and the new popular form in more of the financial system. According to Deutsche Bank in a report, it is not difficult to see that the structural problems brought about by closure hedge fund existing products has become a main focussing of major financial institutions, at the same time, the bank also gives a better solution is to avoid speculation concept, simple game on the existing basis, derivatives more market more transparent, provide financial tsunami hedge fund after a good operation platform.It is groundbreaking because, for the showtime time, investors can access a diversified pool of hedge funds, which is Ucits Illcompliant, transparent, over-collateralised and developed into a package that is as liquid as foreign exchange, says Farouze. Everybody is going to ask how we are providing intra-day liquidity and not taking big risks because the key managers are not liquid, but it is a fundamental misunderstanding that managers are illiquid.Deutsche Bank report a future development direction, but this is not the only direction. In fact, the financial system is with the development of science and engineering science and the process of globalization. While similar to the hedge fund this fund mete for just a few decades, and only in the last ten years of electric raystantial growth, occupy a space for one someone in financial institutions. It is not difficult to see, the future development is diversity, hedge fund concept will be with the development of financial system and complete change. This will later in the paper mentioned. (BANK, 2010)Research QuestionsIn this report, will be around 2 main research. First, the operation mode and the hedge strategy of hedge fund. Second, hedge funds will face what risks and how to avoid these risks.Operation mode about hedge funds will choose more common and easily understood model analysis, through analysis, a direction to try to explain why hedge funds as institutional investors are willing to invest, and position fully understand why financial derivatives play in different market operation. approximately the risk hedge funds face, will be analyzed from different aspects, first of all will be based on several(prenominal) reasons the literature has been mentioned analysis will be between hedge fund managers and investors have problems and explore why hedge fund risk management must be very strict, and will use examples of why once large hedge fund be unable to get up after a fall in the market changes, exit the market stage, finally according to the international economic environment and puts forward some assumptions and analysis of hedge funds will be how to face these difficulties, and puts forward the solution or the method of risk aversion.the operation mode and the hedge strategy of hedge fundHedge funds have a lot of investment strategy, the investment strategy, academic classification is roughly quaternion, arbitrage, event driven, directional and global macro. And the four way investment, should be said that the four main thinking pattern, they can coexist also can invest strategy according to one or more of them adjustment. It is also a reflection of the hedge fund freely. In the paper, classification will be analyzed, and give examples.ArbitrageThe basic idea is to arbitrage fund assets to buy shares, part of the assets of the short selling of shares. Multiple assets amount to buy stocks by the B coefficient (coefficient a measure of stock and market relevance) adjusted to form a long position, short asset amount of the short selling of stocks by the B coefficient adjustment after the formation of short positions, long positions and short positions of the difference between the formatio n of the assets of the fund market position. The market position for long, short or is zero, thereby regulating funds face market risk. When the market position to zero, long / short strategy to become the market neutral strategy, the fluctuation of return and market fund all told unrelated. Through adjusting the market positions, types or further adjustment of portfolio stock, can adjust the portfolio risk degree and the risk types. Hedge is a double-edged sword. When the fund market risk faced by hour, value-added potential of the fund can enjoy the stock market long-term upward trend has also reduced. In addition to hedge market risk, we can also be other risk funds to hedge funds, such as exchange rate risk, interest rate risk, the industry risk etc.. Whenever a risk is hedged, there is no possibility of fund managers use the risk factors for the fund value. In theory, a perfect hedge fund returns should be the risk-free rate minus the transaction cost. Therefore, in practice, the fund manager will not take all the risk factors for hedge funds, but their risk factors cannot grasp the hedged risk factors, leaving his grasp, make investment decisions in these risk factors to obtain excess returns.Stock index futuresStock index futures is not reasonable price the stock index futures market, at the same time to participate in the stock index futures and spot market transactions, or simultaneously in different period, different (but similar) category stock index contracts, to earn post behavior. Stock index futures arbitrage sub now hedge, hedging, hedging and bell ringer city, cross species hedge. commodity futuresSimilar to stock index futures, commodity futures also exists in the hedge strategy, to buy or sell a futures contract at the same time, selling or buying another contract related, and in a time of the two kinds of contracts. Transactions in the form it and hedging some similar, but hedging is to buy on the spot market (or sell) real goods, sellin g in the futures market at the same time (or buy) futures arbitrage and only in the futures market sale and purchase agreement, does not involve the spot transaction. Commodity futures arbitrage are now hedge, hedging, cross market arbitrage and cross species arbitrage.Option hedgingOption is also called the right to choose, is a kind of derivative financial instruments in the future on the basis of. From its essence, option is essentially in the financial sector to the rights and obligations of separate pricing, the right of the transportation within the specified time on whether to trade to recitation its rights and obligations must be fulfilled. In options trading, purchase option is termed the buyer, and the sale of options side is called the vendor the buyer is the right of the assignee, and the seller must fulfill the buyer to exercise the right obligation.Option has the advantages of unlimited income and risk of loss is limited, so in many cases, the option to replace the futures, short hedge trading, will risk arbitrage has smaller and higher rate of return than the futures.