Saturday, March 1, 2008

Hedge Trimming, (Hedge Fund) Article Abstract

This is an abstract off the article concerning the state of the American hedge fund industry, Hedge Trimming from The New Yorker.

I found the article very informative, and decided to do a review of it here for those who do not have the time or easy access to that issue of the magazine.

John Cassidy enlightens the casual New Yorker audience with a review of the hedge fund industry. The story entails a former London banker, Harry Kat, who stumbled into the field while pursuing an academic life. What he had observed did not leave much of a morally respectable notion.

Privately owned, typical hedge funds operate as financial companies. They generally raise capital off moderately affluent clients, ranging from charitable groups to individuals of high net worth. The business model centers on absolutely returns via investments or speculative trading on the financial markets, while applying the “Two & Twenty” principle. 2% charged as management fees and 20% out of the excess returns, if any, as an incentive fee.

Behind the mystic hedge fund veil, questions arise. Cassidy ponders whether these companies actually provide additional value toward exclusively wealthy clients in spite of the “Two & Twenty” fee structure. The findings seem blurred at best. According to Kat however, as a professional in the industry, the average hedge fund does not meet expectations fully as many did not outperform much better than strategies he designed personally.

The hedge fund society holds a complex web of entities and peculiar relationships, and Cassidy provides a candid look inside. While no definitely conclusion resulted, it certainly helps readers make more informed decisions toward investment arenas of tomorrow.

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