Hedge Funds Finance

Fin 310

9/5/2012

Is It Skill, Luck, or Inside Trading?

Hedge funds have been growing tremendously in the past decade to be one of the biggest sources of income for investors. Hedge funds not only invest in shares, but they also branch out to invest in loans, play a role in private placements, and gain strong voting rights in corporate boards. The first thing anyone learns about investments is that it should never be based on luck. Most successful investors have gained incredible amounts of capital by doing careful statistical studies about immerging companies and corporates with great future potential growth. While that might be true, skillful research and statistical studies are not always the path investors take, in this case hedge funds. In my opinion, hedge funds use both skill and inside information in order to gain more return on their investments and attract more investors.

In order to understand what means do hedge funds use to gain money, we should first understand how hedge funds work. Hedge Funds basically attract distinguished investors to invest their money in assets selected by the hedge fund employees. It basically gives investors the easy way to put their extra money in investments that have promising growth and remarkable return on assets. In other words, hedge funds have the ability to invest the money given to them by investors in the assets they think are the best way to go.

Now that we know how hedge funds work, it is easier to understand whether they are truly using insider information to gain capital, or they just have spectacular instincts and research skills. Getting inside information is very desirable, especially for hedge funds looking to diversify their investments and attract potential investors. In order to succeed in such a competitive market, hedge fund managers sometimes need to go out of their way and use illegal and unethical methods to gain the upper hand and distinguish their funds from their competitors. Sources of...