Characteristics Strategies and Aspects of Hedge Funds

Seminar paper from the year 2007 in the subject Business economics - Banking Stock Exchanges Insurance Accounting grade: 11 Berlin School of Economics course: National and International Financial Relations language: English abstract: With the recent announcement of the investment bank Bear Stearns that two of their hedge funds High-Grade Structured Credit Enhanced Leverage Fund and High-Grade Structured Credit Fund had become nearly worthless the discussion about hedge funds was newly rekindled. The funds were mainly invested in the market for mortgages loans to debtors with a medium or low degree of credit worthiness the so called sub prime lending. They traded with collateralized debt obligations (CDO) which bunch the risk of those loans. Due to the decline in prices of properties and the increase in interest rate debtors got into trouble. Therefore the CDOs lost worth and the funds became bankrupt. Even if that is very problematic for the investors and the investment bank some economists think that there could occur bigger problems. Meanwhile there are rumours that other funds got into trouble and economists worry that they could destabilize the whole financial system due to their close relations to other financial institutions. Banks in particular which financed the funds are in danger of being affected. Whether this small crisis will spread or not can actually not be answered. In the next days and months that remains to be seen. But for sure the discussion about hedge funds will be renewed. Therefore this essay will deal with that complicated topic. It is tried to explain what hedge funds are and how they work. For this purpose first of all a proper definition for hedge funds is given. Secondly the origin of hedge funds will be described and then the typical characteristics will be elaborated. Next there is a short overview of the common strategies and about the development of hedge funds given. In the last part the positive and the ne