We have seen what is happening to the investment banking these days. One by one all the big names are getting into irretrievable position to get wound up or get merged with other big names.

We have discussed some of the reasons for their present plight and position (Readers may browse my earlier blog The lessons one may have to learn from markets these days)

Now, what next?  It is my bet hedge funds may face some difficult times in the days to come.

Why hedge funds are next in the list (or hit list)? What is so special about them? What makes them the envy of the market place? Let us look at what they really do and dont do.

Hedge funds can be best described as privately offered, pooled investment vehicles that are not widely available to the public and the assets of which are managed by a professional investment management firm.  (Source: The Managed Funds Association)

Hedge funds are also best described as entrepreneurial investment companies that operate with little or no constraints (both regulatory and management driven).

They are very popular with high net-worth individuals, endowments, pension funds and insurance companies because they are assumed to produce spectacular returns for the investors. Of course considerable number of hedge funds have lost a sizeable portion of their very principal itself in their operations. Despite this, hedge funds are very popular in the market place.

Their investment strategies differ substantially and strategically from each other and they can be grouped into generic types i.e., directional and non-directional.

Directional strategies attempt to take advantage of movements in the level of market. They include macro, short selling, emerging market, most equity long/short and distressed debt management.

Non-directional strategies deliberately exploit anomalies in the pricing of comparable securities. Thus they can be called as arbitrage strategies.  Some may even term as relative value strategies.

Well. Ultimately all funds whether hedge funds (for large investors) or mutual funds (for small investments)  seek to maximize returns for their investors!

Some succeed while many fail in this endeavour. Some may conclude that in the final reckoning the investors luck only counts in such stock market operations / financial investments. Is it really so?

Hedge funds deal in huge money and most of the times sheer money size makes money in the hedge fund industry. They have made history in making huge market movements in a short time with their huge funds. Some even doubt the present high price oil scenario was also hedge funds creation.

If I am not mistaken, I would like to even call them bet funds instead of hedge funds as I have read recently that hedge funds also fund litigations. And they have been accused previously of making currencies crumble and stock exchanges squeeze by their sheer size of investment and pull out at the opportune time. 

While no one can find fault with them, the regulators and monetary authorities are very serious about the hedge funds raids on their economy. That is why, we hear nowadays very loudly that regulators are contemplating (or already working out) some kind of regulations to regulate this industry as a whole.

So our hedge funds may have to watch out now.