Hedge Funds

Volume III Fall 2008

Hedge Funds

Ashish Patel

1

Table of Contents

Preface 1. Introduction 1.1 Definition of Hedge Funds 1.2 Effects of hedge fund operations on the financial markets 2. An Insight into Hedge Fund Operations 2.1 Hedge funds vs. Mutual funds 2.2 The use of leverage 2.3 Shorting the market and the use of complex investment tools 2.4 Hedge funds and Systemic risk 2.5 Investment style categories 3. The Bear calamity 3.1 Highlights of the main issues of the recent collapse of Bear Stearns 3.2 Analysis of the Fed’s “bail out” 4. Regulation 4.1 The case for and against regulation 4.2 Relevant policy issues – insight from major stakeholders within the industry 4.3 Current litigation – Relevant aspects of US Treasury Secretary, Henry Paulson’s plan discussed in detail 5. Conclusion: Is tighter regulation the answer to curbing future turmoil? 6. Bibliography

2

Preface

This paper is a culmination of extensive research conducted during the months between January and May 2008. Since this time frame much has changed within the financial markets of the United States. The timeline in which this paper was written identifies the beginnings of the financial crisis we find ourselves in today. When I wrote this paper I discussed the controversial bail out of Bear Stearns, which conjured up a massive debate amongst many in Washington. However, in recent past we have seen that Bear Stearns was only the “tip of the iceberg”. Many of my conclusions are a far cry from what is the general consensus on regulatory issues amongst Americans today. However, I intend to offer readers a different viewpoint from the general consensus of harsher regulation and would like readers to understand that there are various repercussions that arise as a result of any policy change.

3

1. Introduction

Within the last decade or so hedge funds have become major players within the United States’ capital markets. By attracting large pools of private capital, combined...