Hedge Funds or Short Sellers?

Hedge Funds first started gaining popularity after the 1997 asian economic crisis as the hedge funds tend to be skill-based investment strategies whose returns are considered "absolute," as they do not depend on the relative long-term return of underlying traditional stock and bond markets. As their name suggests, these funds are mainly used as hedge against the volatilities associated with the investment in securities. Evaluating the performance of hedge funds is non trivial task as the hedge fund managers are not required, and in many cases not allowed, to advertise or report performance data to any central authority. As a result, many of the top hedge fund managers are not listed in commercially available databases.




Over the years it has long been accepted that risk management is a core competency for generating absolute returns within a hedge fund strategy. Further, the hedge fund strategies have had a history of offering returns independent from the performance of stock and bond markets. One commonly used technique is by short selling. However many funds that do not hedge but are active only in short selling have recently been getting the limelight as the primary objective of the hedge funds was violated. Financial researchers have been been advising their clients to invest in these funds with caution, however many have fallen into the trap of myopic short sellers. Prior to the current market downturn, hedge fund managers were able to diffuse requests for transparency. However, increased regulation, scrutiny and transparency are knocking the doors of the hedge fund industry. This is seen as the silver lining by many investors whose faith which was the instrument of cash inflows was subject to the merciless greed of many fund managers.

The outcome of the bloodbath at the stock markets all over the world has highlighted the importance of effective governance and risk management in hedge funds coupled with the need of greater visibility into a hedge fund manager's governance and risk programs.