1. Overview of hedge funds

1. What is a hedge fund (definition and characteristics)

Be able to name many aliases for hedge funds, such as hedging funds, Arbitrage funds and hedge funds, but it’s not easy to figure out what a hedge fund is. Various large-scale financial reference books published in China since the 1990s, such as "New International Financial Dictionary" (edited by Liu Hongru, 1994) and "Encyclopedia of International Finance" (edited by Wang Chuanlun et al., 1993), have selected "hedging". )", "fund", "arbitrage", "mutual fund" and other entries, but there is no entry for "hedge fund", indicating that until the mid-1990s, although the number of hedge funds Some related terminology has already entered the market, but hedge funds are still unheard of.

The foreign understanding of hedge funds is also quite confusing. Let’s list some of the latest research literature’s definitions of hedge funds as follows. The IMF's definition is that "hedge funds are private investment portfolios, often established offshore to take advantage of tax and regulatory benefits." Mar/Hedge, the first institution in the United States to provide business data on hedge funds, defines it as “taking incentive commissions (usually 15-25%) and meeting at least one of the following criteria: the fund invests in a variety of assets; Funds that are long must use leverage; or the fund uses various arbitrage techniques within its investment portfolio. HFR, another American hedge fund research institution, summarizes hedge funds as: "Taking the form of private investment partnerships or offshore funds. Collect commissions based on performance and use different investment strategies. "VHFA, a well-known American pioneer hedge fund international advisory company, is defined as "taking the form of a private partnership or limited liability company and investing mainly in publicly issued securities or financial derivatives."

Federal Reserve Chairman Greenspan gave an indirect definition of a hedge fund when testifying to the U.S. Congress on the issue of Long-Term Capital Management (LTCM). He said that LTCM is a hedge fund, or an organization that avoids regulation by limiting its clients to a small number of very sophisticated and wealthy individuals, and pursues high returns on investment and trading in a large number of financial instruments. Same fund.

Based on the above definitions, especially Greenspan’s indirect definition, we believe that hedge funds are not “outsiders”. They are still nothing more than a type of mutual funds, but the organizational arrangements are relatively complex. Specially, there are fewer investors (including private individuals and institutions). To use a metaphor, it is like a "rich people's investment club", in contrast, ordinary mutual funds are like a "public investment club". Due to the special organizational arrangements of hedge funds, they are able to exploit loopholes in the current law, are not subject to supervision, and can use all financial instruments without restriction to obtain high returns, thus creating many differences from ordinary mutual funds.

Some people believe that the key to hedge funds is to apply leverage and invest in derivatives. But in fact, as the IMF points out, other investors also participate in exactly the same operations as hedge funds, such as the proprietary business units of commercial banks and investment banks taking positions, buying and selling derivatives, and moving their assets in the same way as hedge funds. combination. Many mutual funds, pension funds, insurance companies and university endowments are involved in some of the same operations and rank among the most important investors in hedge funds. In addition, commercial banks also use leverage in the sense that the total assets and liabilities of commercial banks in a segmented banking system are several times their capital.

Through the interpretation of the literature, try to make the following comparison between hedge funds and general funds (Table 1). From this, we can clearly see the characteristics of hedge funds, and then accurately grasp what hedging is. fund.

Table 1 Comparison of characteristics between hedge funds and *** mutual funds

Hedge funds*** mutual funds

The number of investors is strictly limited by U.S. securities laws : If you participate in the name of an individual, your personal annual income in the past two years must be at least US$200,000; if you participate in the name of a family, the couple’s income in the past two years must be at least US$300,000; if you participate in the name of an organization, your net worth must be at least Over US$1 million. New regulations were made in 1996: the number of participants was expanded from 100 to 500. The conditions for participation are that individuals must own investment securities worth more than $5 million. Unrestricted

There are few restrictions on investment portfolios and transactions. Key partners and managers can freely and flexibly use various investment techniques, including short selling, trading of derivative securities and leverage restrictions

Regulation is not regulated. The U.S. Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940 have stipulated that institutions with less than 100 investors do not need to register with financial authorities such as the U.S. Securities and Exchange Commission when they are established. and are exempt from regulatory requirements. Because investors are mainly targeted at a small number of very sophisticated and wealthy individuals who have strong self-protection capabilities. Strict supervision Because investors are ordinary people, many of whom lack the necessary understanding of the market. Strict supervision is implemented to avoid public risks, protect the weak, and ensure social security.

Methods of financing: The Private Equity Securities Law stipulates that it is not allowed to use any media for advertising when attracting customers. Investors mainly participate in four ways: based on so-called "reliable investment information" obtained in upper class society; directly knowing a certain person Manager of a hedge fund; transferred through other funds; specially introduced by an investment bank, securities intermediary company or investment consulting company. Public offering: Public advertising to attract customers

Can it be established offshore? Offshore funds are usually established. Advantages: Avoiding the investor limit and tax avoidance under US law. Often located in tax havens such as Virgin Island, the Bahamas, Bermuda, Cayman Island, Dublin and Luxembourg, where taxes are minimal. Of the US$68 billion managed by hedge funds calculated by MAR in November 1996, US$31.7 billion was invested in offshore hedge funds. This shows that offshore hedge funds are an important part of the hedge fund industry. According to WHFA statistics, if "funds of funds" are not included, the assets managed by offshore funds are almost twice that of onshore funds. Cannot be established offshore

Information disclosure level information is not disclosed, and financial and asset status information does not need to be disclosed

Managers receive 1%-2% of the assets under management with remuneration commission + commission Fixed management fee, plus incentives of 5%-25% of annual profits. Generally, it is a fixed salary

Whether the manager can participate in shares or not

Are there any regulations or restrictions on the withdrawal of capital by investors? Most funds require shareholders to inform in advance if they withdraw capital: the time for advance notification It varies from 30 days ago to 3 years ago. No restrictions or few restrictions

Can loan transactions be carried out? Own assets can be used as collateral for loan transactions. Loan transactions are not allowed.

Size Small scale Global assets are approximately 300 billion. Large-scale global assets exceed 7 trillion

Performance is relatively good. The average annual return rate from January 1990 to August 1998 was 17%, which is much higher than general stock investment or retirement funds and** *Investments in the same fund (the average annual growth rate for Wall Street's S&P 500 stocks during the same period was only 12%). According to reports, some well-run hedge funds have annual investment returns as high as 30-50%. Inferior in comparison

2. What is "hedging" and why is hedging necessary?

"Hedging" has also been translated as "hedging", "protecting the market", "supporting the market", "top insurance", "hedging", "hedging", etc. Early hedging refers to "a trading method that offsets the price risk in spot market transactions by making a contract transaction in the futures market with the same type and quantity of commodities as in the spot market, but with opposite trading positions" (Liu Hongru, editor-in-chief, 1995). Early hedging was for real value preservation and was used in agricultural products markets and foreign exchange markets. Hedgers are generally actual producers and consumers, or those who own goods to sell in the future, or those who need to purchase goods in the future, or those who have claims that need to be paid in the future, or those who have debts that need to be repaid in the future. etc. These people are faced with the risk of losses due to changes in commodity prices and currency prices. Hedging is a financial operation done to avoid risks. The purpose is to avoid (pass on) the exposed risks in the form of futures or options, etc. Thus, there is no exposure risk in one's asset portfolio. For example, a French exporter knows that he will export a batch of cars to the United States in three months and will receive US$1 million, but he does not know what the exchange rate of the US dollar against the franc will be in three months. If the US dollar falls sharply, he will will suffer losses. To avoid risks, you can short-sell the same amount of U.S. dollars in the futures market (payment will be made three months later), that is, lock in the exchange rate, thereby avoiding risks caused by exchange rate uncertainty. Hedging can be done by either selling short or buying short. If you already own an asset and plan to sell it in the future, you can lock in the price by selling the asset short. If you want to buy an asset in the future and are worried about the asset's price rising, you can buy futures on that asset now. Since the essence of the problem here is the difference between the futures price and the spot price at future maturity, no one will actually deliver this asset. What needs to be delivered is the difference between the futures price and the spot price at maturity. In this sense, the buying and selling of this asset is a short purchase versus a short sale.

So what is a hedge fund’s “hedging”? Let’s take the example of Jones, the originator of hedge funds. Jones realized that hedging was a market-neutral strategy that effectively multiplied investment capital by going long on undervalued securities and short on others, allowing limited resources to be made available for large purchases and sales. At that time, two investment tools widely used in the market were short selling and leverage. Jones combined these two investment tools to create a new investment system. He divided the risks in stock investing into two categories: risks from individual stock selection and risks from the market as a whole, and tried to separate these two types of risks. He used a portion of his assets to maintain a basket of shorted stocks as a means of offsetting a decline in the overall level of the market.

On the premise of controlling market risk to a certain limit, he also uses the leverage effect to amplify the profits he obtains from individual stock selection. The strategy is to buy specific stocks for long positions and then short sell other stocks. By buying stocks that are "undervalued" and shorting stocks that are "overvalued," you can expect to make profits regardless of what the market is doing. Therefore, the Jones fund's portfolio is split into two opposite parts: one group of stocks that profits when the market is bullish, and the other group that profits when the market is down. This is the "hedging" method of "hedge funds". Although Jones believes that stock selection is more important than market timing, he increases or decreases the net exposure of his portfolio based on his predictions of market movements. Since the long-term trend of stock prices is upward, Jones Investments is generally "net long."

What will happen if you add financial derivatives such as options? Let’s give another example. If the current price of a company's stock is 150 yuan, it is estimated that it will appreciate to 170 yuan by the end of the month. The traditional approach is to invest in the company's stock and pay 150 yuan. Once a profit of 20 yuan is made, the ratio of profit to cost is 13.3%. But if you use options, you can only use a margin of 5 yuan per share (current stock price) to buy a company's call options with a market price of 150 yuan this month. If the company's stock price rises to 170 yuan at the end of the month, the book profit per share will be 20 yuan, minus the 5 yuan paid as margin, the net profit is 15 yuan (for simplicity, not counting handling fees), that is, a profit of 15 yuan at a cost of 5 yuan per share, and the ratio of profit to cost is 300%. If When I used 150 yuan to invest in options, I earned not 20 yuan, but an astonishing 4,500 yuan.

It can be seen that if derivatives are used appropriately, more profits can be obtained at a lower cost, just like the principle of leverage in physics, with less force at an action point far away from the fulcrum Lift a heavy object very close to the fulcrum. Financial scientists call this the leverage effect. In this case, if it is not for hedging (that is, there is no hedging), but purely for the direction of the market, and using leverage to make bets, once you do it right, you can certainly make huge profits, but the risk is also extremely high. , once a mistake is made, the loss will also be magnified by the leverage effect. The U.S. Long-Term Capital Management Fund (LTCM) uses US$2.2 billion of its own funds as collateral and loans US$125 billion. Its total assets are more than US$120 billion. The market value of various securities involved in the financial products it holds exceeds 10,000 US dollars. billion US dollars, with a leverage ratio of 56.8. A one-thousandth risk can lead to disaster.

3. Hedge Fund Category (Strategy Defined)

Mar/Hedge divides hedge funds into 8 categories based on fund managers’ reports:

1. Macro ( Macro) Fund: Operate based on changes in the global economic situation reflected in stock prices, foreign exchange and interest rates.

2. Global funds: invest in emerging markets or certain specific areas of the world. Although they also operate based on the trends of a particular market like macro funds, they prefer to choose a single market. Stocks with bullish market trends are not as interested in index derivatives as macro funds;

3. Long Only Funds: Traditional equity funds, their operating structure is similar to that of hedge funds, that is, Take bonus commissions and use leverage.

4. Market-neutral funds: reduce market risks through long and short hedging operations. In this sense, their investment philosophy is similar to that of early hedge funds (such as Jones Fund) closest. This category of funds includes convertible arbitrage funds; funds that arbitrage stocks and futures; or funds that operate based on the yield curve of the bond market;

5. Sectoral hedge funds: invest in various A variety of industries, mainly including: health care industry, financial services industry, food and beverage industry, media and communications industry, natural resources industry, oil and gas industry, real estate industry, technology, transportation and public utilities, etc.;

6. Dedicated short sales funds: borrow securities from brokers that they judge to be "overvalued" and sell them on the market, with the hope of buying them back to the broker at a lower price in the future. Investors are often those who wish to hedge traditional long-only portfolios or wish to hold positions in a bear market;

7. Event-driven funds: The idea of ??investing is to take advantage of events that are considered special circumstances. Including distressed securities funds, risk arbitrage funds, etc.

8. Funds of funds: allocate investment portfolios to various hedge funds, sometimes using leverage.

American Vanguard Hedge Fund Research Company (1998) divides hedge funds into 15 categories:

1. Convertible Arbitrage) Fund: refers to the purchase of convertible securities (usually convertible bonds) and hedge the stock risk by short selling the underlying common stock.

2. Distressed Securities Fund: Invests in and may short-sell the securities of companies that have been or are expected to be affected by adverse circumstances. Including restructurings, bankruptcies, distressed sales and other corporate restructurings. Fund managers use S&P put options (put options) or put option spreads (put option spreads) for market hedging.

3. Emerging Markets funds: invest in corporate securities or national bonds in developing or "emerging" countries. Mainly to do long positions.

4. Equity Hedge Fund: Go long on some stocks and short other stocks or/and stock index options at any time.

5. Equity Market Neutral Fund: Take advantage of the ineffective pricing of related equity securities to seek profits, and reduce market exposure risk (Exposure) through a combination of long and short operations.

6. Equity Non-Hedge: Although the fund has the ability to use short-selling stocks and/or stock index options for hedging operations, it is mainly long on stocks. Such funds are called "stock pickers."

7. Major event-driven funds (Event-Driven): also known as "company life cycle" investment. The fund invests in opportunities arising from major transaction events, such as mergers and acquisitions, bankruptcy reorganizations, asset restructurings and stock buybacks.

8. Fixed Income (Fixed Income:) Fund: refers to a fund that invests in fixed income securities. Including arbitrage funds, convertible bond funds, diversified funds, high-yield funds, mortgage-backed funds, etc.

9. Macro Fund (Macro): refers to large-scale directional unhedged purchases and sales directly based on the analysis of the macro and financial environment, based on the expected price movements of the stock market, interest rates, foreign exchange and physical objects.

10. Market timing fund (market timing): buy investments that are on an upward trend and sell investments that are on a downward trend. The fund mainly trades between mutual funds and the money market.

11. Merger Arbitrage: Sometimes called risk arbitrage, it includes investing in event-driven environments such as leveraged acquisitions, mergers and hostile takeovers.

12. Relative Value Arbitrage Fund (Relative Value Arbitrage): Trying to make profits by taking advantage of the pricing differences between various investment products such as stocks, bonds, options and futures.

13. Sector funds: funds that invest in various industries.

14. Short Selling: Involves selling securities that do not belong to the seller. It is a technique used to take advantage of expected price declines.

15. Fund of Funds: Invest among multiple managers or management accounts of a fund. The strategy involves a manager's multi-asset portfolio with the goal of significantly reducing the risk, or volatility, of a single manager's investments.

Although there are many types of hedge funds mentioned above, generally speaking, there are two main categories.

The first is macro hedge funds, the most famous of which is Soros’ Quantum Fund. Many people think that macro hedge funds are the most dangerous funds and have the greatest risks. In fact, macro hedge funds are not the most risky and generally only use 4-7 times leverage. Although macro hedge funds pursue the diversification of investment strategies, these funds still have several common characteristics:

A. Take advantage of macroeconomic instability in various countries. Look for countries where macroeconomic variables deviate from stable values ??and whose asset prices and associated profits fluctuate wildly when these variables become unstable. Such funds take considerable risks in the hope of achieving substantial returns.

B. Managers are particularly willing to make investments where the risk of losing large amounts of capital is significantly zero. For example, during the 1997 Asian financial crisis, investors judged that the Thai baht would depreciate. Although they could not accurately predict the specific date of depreciation, they could conclude that it would not appreciate, so they dared to invest boldly.

C. When the cost of raising funds is low, it is most likely to buy in large quantities. Cheap financing allows them to buy large amounts and hold positions even when they are uncertain about the timing of the event.

D. Managers are interested in liquid markets. They can make large transactions at low cost in liquid markets. In emerging markets, limited liquidity and limited tradable size pose certain constraints to macro hedge funds and other investors trying to build positions. Capital controls or restrictions in emerging markets on domestic banks that do business with offshore peers make it difficult for hedge funds to manipulate the market. Managers also worry about being seen as an opponent of government or central bank transactions because of the inability to invest anonymously in smaller, illiquid markets.

The other type is Relative Value funds, which invest in the relative prices of closely related securities (such as Treasury bills and bonds). Unlike macro hedge funds, they generally do not risk market fluctuations. risk. However, because the price difference between related securities is usually very small, high profits cannot be earned without leverage. Therefore, relative value funds are more likely to use high leverage than macro hedge funds, and therefore have greater risks. The most famous relative value fund is LTCM. Merriweather, the president of LTCM, believes in the "natural rise and fall of differences among various types of bonds", that is, under the influence of the market, unreasonable differences among bonds will eventually disappear. Therefore, if you can discern opportunities, you can use the differences to obtain profits. profit. But the differences between bonds are so small that to make money you have to take risks with high leverage. LTCM has been betting in the European bond market that "before the introduction of the euro, the bond interest gap among EU countries will gradually narrow" because Germany and Italy are the first batch of euro members, and Greece also announced in May this year that it will join the single euro currency union, so LTCM holds large long positions in Italian and Greek government bonds and Danish mortgage bonds, and also holds large short positions in German government bonds. Meanwhile, in the U.S. bond market, LTCM’s arbitrage portfolio consists of buying mortgage bonds and selling U.S. Treasuries. On August 14, 1998, the Russian government ordered a cessation of government bond trading, causing emerging market bonds to plummet. A large number of foreign investors fled and regarded the high-quality bond markets of Germany and the United States as safe islands. As a result, prices of German and U.S. government bonds hit new highs, spurred by stock market corrections. At the same time, emerging market bond markets plummeted, and the interest gap between German and U.S. bonds and other bonds widened. From January to August 1998, the Italian 10-year bond interest rate was higher than the German 10-year bond interest rate. The fluctuation of A1 basically remained between 0.20-0.32%; after Russia suspended the trading of government bonds, the A1 value increased rapidly and became even larger. At the end of August, it hit a new high since November of 0.57%; in September, A1 changed repeatedly, but it was always at a high of 0.45%; on September 28, it even closed at 0.47%. The increase in A1 means that LTCM "buys Italy" The investment portfolio of "Greek government bonds, selling German government bonds" failed (Greek government bonds suffered the same loss as Italian government bonds); a large number of Russian government bonds held at the same time became waste paper because they stopped trading; Danish mortgage bonds naturally could not escape the decline. In the United States, market bond trading is extremely hot, and Treasury bond interest rates have increased. Since August 1, 1998, market interest rates have risen sharply compared to A2, the 10-year U.S. Treasury bond interest rate. On August 21, the U.S. stock market plummeted, with the Dow Jones Industrial Average falling 512 points. At the same time, the selling pressure on U.S. corporate bonds was in sharp contrast to the strong buying of Treasury bonds. The interest rate on Treasury bonds was pushed to a 29-year low, and LTCM fled its short position in U.S. Treasury bonds and was "short squeezed." As a result, LTCM suffered huge losses on both long and short sides of its bond investment portfolio in the European and American bond markets. At the end of September, the company's net asset value dropped by 78%, leaving only US$500 million, and it was on the verge of bankruptcy.

3. The history and current situation of hedge funds

(1) Founding stage: 1949-1966

The originator of hedge funds is Alfred Winslow Jones. Jones started out as a sociologist, then became a journalist, then a fund manager. In 1949, while working for Fortune magazine, Jones was assigned to investigate technical methods of market analysis and write articles. As a result, he became a proficient person from a novice almost overnight, and established a partnership investment company two months before the article was published. The company has the classic characteristics of later hedge funds, so it is considered the world's first hedge fund. There is an incentive commission system and by investing his own capital in the fund, general managers are paid a salary of 20% of the profits realized. In addition, Jones created a set of simulated indicators over the next decade.

Jones Company was originally a general partnership and later changed to a limited partnership. Its operations were kept secret and its performance was good.

(2) Initial development and change stage: 1966-1968

In 1966, another reporter of Fortune, Carol Loomis, discovered the Jones Fund with extraordinary performance and wrote an article praising " Jones is unmatched." The article describes in detail the structure and incentives of the Jones Fund, as well as the simulated indicators created by Jones in subsequent years, and lists the return rate of the Jones Fund - net of remuneration, which is significantly higher than that of some of the most successful peers. fund. For example, its return over the past five years was 44% higher than the Fidelity Trend fund, and its return over the past 10 years was 87% higher than the Dreyfas fund. This led to a huge increase in the number of hedge funds. Although the exact number of funds established in the following years is not known, according to an SEC investigation, 140 of the 215 investment partnerships formed by the end of 1968 were hedge funds. funds, most of which were established that year.

While the rapid growth of hedge funds has coincided with strong stock markets, some fund managers have found it difficult, time-consuming and costly to hedge their portfolios through short selling.

As a result, many funds are increasingly turning to large positions to amplify long-stock strategies, and hedge funds have begun to develop into multiple categories. The so-called "hedging" is nothing more than a symbolic meaning.

(3) Low period: 1969-1974

The stock market decline from 1969 to 1970 dealt a catastrophic blow to the hedge fund industry. According to reports, the SEC investigated at the end of 1968 Of the 28 largest hedge funds, their assets under management had dropped by 70% by the end of the 1970s (due to losses and divestments), and five of them had closed down. Smaller funds fare even worse. The stock market decline of 1973-1974 once again caused hedge funds to shrink sharply.

(4) Slow development stage: 1974-1985

From 1974-1985, hedge funds resumed their operations in a relatively secretive manner. Although macro hedge funds emerged during this period, generally speaking, they did not develop too quickly.

(5) Great development stage: after the 1990s

Hedge funds flourished with the emergence of a large number of financial innovation tools after the relaxation of financial controls. Especially after the 1990s, the economy With the intensification of financial globalization, hedge funds have ushered in an era of great development. In 1990, there were only 1,500 hedge funds in the United States, with total capital of just over US$50 billion. Since the 1990s, hedge funds have increased rapidly, and the development speed in the past two years has been even more alarming. According to a survey by the American "Hedge Fund" magazine, there are currently about 4,000 funds with assets exceeding US$400 billion. According to data from fund consulting firm TASS, there are currently more than 4,000 hedge funds in the world, more than double the number two years ago, and the total value of assets under management has increased significantly from US$150 billion in 1996 to the current 4,000. billion dollars. According to information from the American Vanguard Hedge Fund International Consulting Company, there are currently more than 5,000 hedge funds in the world, with assets under management exceeding US$250 billion. It is also predicted that in the next 5-10 years, US hedge funds will grow at an annual rate of 15%, and the growth of their total capital will be higher than 15%. It is worth noting that American hedge funds are attracting retirement funds, various foundations and investment managers to form a more powerful force. Five years ago, investments in retirement funds and various foundations accounted for only 5% of total hedge fund capital, and now it has surged to 80%.

5. Currently, the major international hedge fund organizations

Currently, only the United States has hedge funds in the world. Some European countries also have similar funds, but their official names are not hedge funds.

Hedge funds are so famous that many people assume they must be "Big Macs" ("600-pound gorillas"). In fact, most hedge funds are not large in scale. Distinguished by total capital: only 5% are above US$500 million; about 30% are between US$50 million and US$500 million; about 65% are below US$5 million. About a quarter of hedge funds have total assets of no more than $10 million. Some people say, "They operate like small workshops, usually working in an office with only one or two people."

Ranking The top 10 U.S. international hedge funds are: Jaguar Fund (assets of $10 billion), Quantum Fund (assets of $6 billion), Quantum Industrial Fund (assets of $2.4 billion), Quota Fund (assets of $1.7 billion), Omar Canada Overseas Partners Fund (asset category III: US$1.7 billion), Maverick Fund (asset of US$1.7 billion), Zweig-Demena International Corporation (asset of US$1.6 billion), Quasar International Fund (asset of US$1.5 billion) U.S. dollars), SBC Currency Securities Fund (assets of $1.5 billion), Perry Partners International (assets of $1.3 billion).

The top 10 domestic hedge funds in the United States are: Tiger Management (assets of $5.1 billion), Moore Global Investments (assets of $4 billion), Highbridge Capital (assets of $1.4 billion) , INTERCAP (Assets $1.3 billion), Rosenberg Market Neutral Fund (Assets $1.2 billion), Ellington Comprehensive Fund (Assets $1.1 billion), Arbitrage Tax Equivalent Fund (Assets $1 billion) , quantitative long-short selling funds (assets of $900 million), SR International Fund (assets of $900 million), Perry Partners (assets of $800 million).

2. Hedge funds and financial risks

Since the 1990s, the hedge fund industry has achieved great development, and its performance has attracted attention. The 1990s were also a period of international financial turmoil and risks. In the increasingly troubled times, from the European currency crisis in 1992, the bond market crisis and the Mexican crisis in 1994, to the Asian financial crisis in 1997, the world seems to be becoming more and more restless. Many blame hedge funds as a source of financial risk, particularly the Asian financial crisis. We first provide a general discussion of this popular statement, and then introduce some empirical analysis of the role of hedge funds in the 1997 Asian financial crisis, citing data.

1. Hedge funds and financial risks: general discussion

Generally speaking, hedge funds are not more unsafe than other institutional investors for the following reasons:

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(1) Relatively small scale.

By the end of 1997, the global assets of hedge funds were only US$300 billion, while the assets managed by institutional investors in mature markets exceeded US$20 trillion, including mutual funds, pension funds, The funds managed by insurance companies and non-financial companies amounted to US$11 trillion, and global mutual funds amounted to US$7 trillion in 1996.

(2) Most hedge funds do not use leverage or use a small leverage ratio. Some people may say that although hedge funds are small in size, they use large leverage. This is not the case. VHFA's research shows that hedge funds as a whole use moderate leverage. About 30% of hedge funds do not use leverage, about 54% of hedge funds use leverage less than 2:1 ($1 is invested as $2), and only 16% of hedge funds use leverage greater than 2:1 (that is, the amount of borrowed money exceeds its capital). Very few hedge funds have leverage greater than 10:1. And most hedge funds that use high leverage carry out various arbitrage strategies, so the amount of their leverage is not necessarily an accurate measure of their actual market risk. At the same time, banks, companies and institutional investors also use leverage. Considering that the assets they manage combined are several times that of hedge funds, it is not difficult to imagine who has a greater role.

(3) Lack of information on hedge funds. Some people believe that hedge funds can also take advantage of the "herding effect" and become the leader themselves. If this is true, it will depend on information and the ability to process it.