Hedge Funds and their Fall

Paper Summary:

The paper explains how hedge funds work, how they can have substantial sway over markets and why many pension funds invested heavily in hedge funds. The paper then discusses how many hedge funds invested heavily in the sub-prime mortgage market, that led to a volatile situation that devastated the pensions of many middle class workers, crippled mortgage lenders and had a broad effect on the economy. The paper considers the argument that homebuyers and investors are not completely to blame for the worldwide credit crunch but contends that people need to take personal responsibility for their own finances. The paper maintains that by bailing them out, we would only be increasing the likelihood that a bubble will happen again when the next get-rich-quick financial fad pops up.

From the Paper:

"Hedge funds are private investment funds that charge a performance fee of usually around twenty percent. Many legal rules that apply to other types of funds such as mutual funds do not apply to hedge funds. Instead, hedge fund managers write up contracts that spell out the rules governing each particular fund. This allows hedge fund managers to follow more aggressive investment strategies than is legally possible for normal mutual funds. These funds often hedge their investments against negative developments in equity and other markets because the common goal is to create returns that are not necessarily in line with those of the larger financial markets."

Sample of Sources Used:

• Green, R.K. (2007, September 9). Next In Line for Subprime Hit: Bonds? Money Magazine. http://money.cnn.com/2007/09/09/markets/bondcenter/bonds_subprime.ap/index.htm
• Kwok, V.W. (2007, August 15). Asian Losses on U.S. Subprime Spook Investors. Forbes. http://www.forbes.com/markets/2007/08/15/asia-subprime-losses-markets-equity-cx_vk_0815markets42.html
• Wong, G. (2007, September 11). Hedge Funds Hit in August. Money Magazine. http://money.cnn.com/2007/09/11/markets/hedge_fund_performance/index.htm

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