The growth of hedge funds have caused some concern. While this practice might benefit certain investors in the short-term but in the long term it can do more harm than positive. Hedge funds typically take on large stakes, and this can cause other investors to follow their lead. Governments have also thought about new regulations to regulate the market. However, the current regulation of hedge funds could not be sufficient. To avoid the development of a new Ponzi scheme, they must enhance the transparency of hedge funds.
An effective method to evaluate the effectiveness for hedge funds is do a an analysis of peer results of investment strategies that are similar to theirs. Analytical software like Morningstar to determine the number of funds that employ the same investment strategy. This analysis will show many different metrics which can be further broken down to deciles, or even quartiles. If you want to make your choice based on the findings of the peer analysis you might want to establish guidelines. If, for instance, an investment has a score higher than the 50th percentile, then it might be a good idea to look for another one.
Another method of evaluating hedge funds would be to look at the rewards and risks involved. They generally invest in a range of different assets. They can be short-term or long-term. The majority of hedge funds have some kind of hedge strategy that is in place. Strategies employed by hedge funds are typically described in prospectuses and you’ll have to adhere to SEC guidelines and rules. Certain hedge funds have redemption fees, that are charged for withdrawals that are made early. These fees are intended to deter investors from pulling out of investment portfolios that have poor performance and reduce turnover.
Another concern in the hedge fund industry is regulatory aspect of the business. In the Investment Company Act of 1940 restricts them from public offerings. Additionally, there are anti-fraud provisions within the Securities Act of 1933 and Securities Exchange Commission. Furthermore the majority of hedge funds are located within the U.S. are regulated by the Commodity Futures Trading Commission. In turn, they could become subject to further rules in the near future. This means that the majority of investors will be forced to rely on other counterparties.
Alongside the issues with regulation hedge funds can also be susceptible to fraud. In the 1990s hedge funds were implicated in the crisis in the bond market and were the subject of negative press. In 1997, following the Asian financial crisis, fears about hedge funds increased. In 1998, reports of massive hedge fund transactions resulted in the imminent bankruptcy of a large hedge fund. The government was forced to lead an unpopular public sector bailout for LTCM.