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Strömqvist, Maria --- "Hedge Funds and their Impact on Systemic Stability" [2012] ELECD 247; in Athanassiou, Phoebus (ed), "Research Handbook on Hedge Funds, Private Equity and Alternative Investments" (Edward Elgar Publishing, 2012)

Book Title: Research Handbook on Hedge Funds, Private Equity and Alternative Investments

Editor(s): Athanassiou, Phoebus

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781849802789

Section: Chapter 12

Section Title: Hedge Funds and their Impact on Systemic Stability

Author(s): Strömqvist, Maria

Number of pages: 23

Extract:

12. Hedge funds and their impact on
systemic stability
Maria Strömqvist*


INTRODUCTION

`Hedge fund' is a collective term for different types of investment fund.
Generally speaking, a hedge fund is a fund with absolute return targets for
financially sophisticated investors. Although many hedge funds protect
their investments against losses (so-called hedging) this does not apply to
all hedge funds, which, in fact, use many different investment strategies.
Hedge funds do, however, have a number of common characteristics that
distinguish them from other types of fund. In general, hedge funds employ
more flexible investment strategies, in search for `absolute returns'.
Currently, a more liberal regulatory framework than for mutual funds
enables hedge funds to pursue more dynamic investment strategies, with
both long and short positions and the use of derivatives. Hedge funds can
also choose to have a higher level of leverage compared to other types of
fund.
Mutual funds have a relative return target, where the result of the
fund is compared against a designated index. Hedge funds, on the other
hand, have an absolute return target, irrespective of the development of
the market as a whole, their goal being to achieve a return that has a low
correlation with traditional risk factors such as stock- and bond indices.
The part of the return that is independent from the risk premiums in the
financial markets is known as alpha and it can be calculated as a residual.1
Even if the goal of hedge funds is to be ...