July 18, 2006

Implications of Growth of Hedge Funds

Hedge funds represent a small portion of the US financial markets. Yet, they have grown significantly in size and influence in recent years. The growth in hedge funds has been fueled primarily by the increased interest of institutional investors such as pension plans, endowments and foundations seeking to diversify their portfolios with investments that offer absolute return strategies. Hedge funds contribute significantly in protecting investment principal.

The investment goals of hedge funds vary among funds. Many hedge funds seek to achieve a positive, absolute return rather than measuring their performance against a securities index or other benchmark. Hedge funds invest in equity and fixed income securities. Some hedge funds may take on substantial advantage and employ certain hedging and arbitrage strategies. They engage one or more broker-dealers to provide a variety of services including trade clearance and settlement.

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