Hedge Fund

David Storrs, the president of The Common Fund, is facing a hard choice, whether he should add a hedge fund to the company’s products line. High return and low correlation with market of hedge funds have greatly attracted him. If the hedge fund be added, it probably increases the return of entire The Common Fund meanwhile reduce the risk of investment through reasonable composite. However, the distinguish features of hedge funds, such as limited exit possibilities, low transparency and high leverage, have troubled in David.

Given the characteristic of hedge funds, it is very difficult to eliminate these troubles. Lack of limited exit and too much monitor to hedge funds would be result in inflexibility in making investment decision. Leverage is also kind of investment strategy for persuit of high return. Even though leverage with high risk, the managers can control it very well. OF course, The Common Fund can establish a mark of leverage to avoid too high risk.

In the long run, since the increasing hedge funds emerging in the market, there would be fierce competitive among hedge funds. That means there are more competitors and less opportunity. For getting the high return and remaining their reputation, the hedge funds managers use any strategies what they can do. Excessive leverage is likely to be used and the risk is too high to accept by market and government, then some relative policies would be published and reduced the flexible in investment of hedge funds. Besides, as mentioned in the case, several organizations managed more than one hedge fund and many famous mangers had expanded their strategy to macro bets. That means the correlation between hedge funds and market would be not as low as before.

As for the marketing hedge fund, it is not good idea move the assets of the less sophisticated endowments to the hedge fund for persuit of high return.