The world of hedge funds may be returning, according to a survey by data provider Prequin. However, are the reasons behind its increase in popularity based on an evolution in economic expertise or a reapplication of the same principles that created the atmosphere of distrust that we currently live in?
While the average individual with a 401k or a 60 month CD would consider a start-up hedge fund the financial equivalent of Russian roulette, 71% of professional investors are considering investing in emerging managers, up from 61% just 12 months ago. The primary reason? Most likely, the rebound of the hedge fund market in 2009.
Don’t worry, though. Investors aren’t jumping back in completely blind. There are certain qualifications.
“What investors are looking for in a startup hedge fund is continuity, with a strong team, a long track record and attractive risk-adjusted returns in essentially the same strategy that a manager is running now. They don’t want to take business risk,” said Edgar Senior, head of global capital services at Credit Suisse.
The return of the high risk investment tool was inevitable, and any expert will tell you the time to make money is in a recession. However, if the next generation of hedge fund start-ups are going to be the barometer as to how the financial community considers perilous investments, they need to be careful. Just because many are willing to take the risk, hedgefund managers should not take this as a sign that the status quo will be acceptable. There is an underlying responsibility to increase (or at least improve) the methods of communication, specifically the appearance that all is being done to inform and examine the intricacies of any controversial components. The SEC has already put the industry on notice.
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