May 26, 2006

Is hedge fund risk for real?

Yes, whenever a hedge fund collapses, it is bad news for all. You cannot ignore it, as it has the potential to shake the financial stability of the market depending on the kind of investments made. The recent turmoil in the stock market is further discouraging hedging in emerging markets.

Especially the emerging markets, as they have the tendency to develop cold feet in the face of crisis with liquidity problems. This could pose a major risk for the hedge funds as the derivatives market is not well developed. But things are changing and looking at the returns, it's worth taking the risk.

Hopefully, hedge funds in these markets have done their homework and have strategies in place. Including the key players namely, the hedge fund counterparties, i.e., the brokers and bank's prime brokerage division who are supposed to be the custodians are extra cautious of their dealings.

So unless something drastic like a natural calamity destroying the economy happens, which will inevitably result in the fleeing of investors, the hedge funds are treading safe pathways in the emerging markets.

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