Business institutions are brought into existence on bases of various objectives. These objectives give the business a clear target. From these, an enterprise can draw up plans, mission, vision and goals. All these define where the firm is heading to and how will it reach to its destination. In the cause of business operations, it is faced by risks and uncertainties. In every business undertaking, means taking risks on the outcome.
This puts firms in an edge to manage different risks that may prevail on their operations. These risks may include financial risks, liquidity risks, inflation risks, market risks, economic risks, credit risks, unsystematic risks, business risks, purchasing power risk, currency risk among others(Baums Cahn, 2004). Risks are all likelihood or probability of a loss in future. Risks can result from internal conditions or factors as well as external factors that may have a negative impact to operations or profitability of an organization in the business community. All these make a company or a firm to take measures either to reduce risk or to diversify its operations to manage all potential risks (Baums Cahn, 2004).
Hedge Funds
Risks management entails dealing with risks by accepting risks, transferring risks, reducing them, or eliminating them using appropriate control measures and implementing strategies to deal with risks. Globalization in business operations has ensured that risk does not only affect one company, but all, countries, and continents at large. This risk practice calls for ways to deal with risks internationally. One of the international appropriate and recommended methods of dealing with risks is through hedging.
Hedging refers to the appropriate positions taken by a firm, establishing in a market to offset occurrence to prices fluctuations. Financial hedging involves taking strategies to reduce risk by making transactions in one investment to protect loss of the other i.e. balancing Portfolios. Due to a high desire to reduce risks by companies internationally, using hedging method businesses has erupted to diversify and reduce risks at a fee.
These firms are called hedge funds. Hedge fund are funds used to buy and sell undervalued securities, contracts, currencies and bonds, taking opportunities in any market either bearish or bullish to reduce risks for maximum gains. Hedge funds are investment portfolios that utilizes investment strategies like, selling short shares in a bearish market, exploiting price differences of different securities, trading options on contracts that depend on future fixed security performance, investing in anticipation for either a merger, hostile take over or buy outs, or purchasing discounted securities from firms that are suffering from financial distresses. In all these strategies, hedge funds benefits due to their non correlations in securitiesequity trading (Modise Nupen, 2007).
Market volatility reduction and risks reduction is the single most, important and primary objective of hedge funds. They do this without reducing their capital base and still make positive returns under all trading conditions.
Different hedge fund uses different strategies to meet their aims of good returns and reducing volatility or risks. Thus, they use appropriate strategies to suit their type of investment. Some may adopt strategies to make steady returns irregardless how the market is performing while others try to make higher than expectations and maintain some market exposures.
When forming hedge fund, it is strictly prohibited to have public offering or any kind of advertising and one is supposed to secure investor in word of mouth, brokers, or registered representatives (Astarita, 2006). Hedge funds were created more than fifty years ago. These are unregulated institutions with information which is mostly not available or it is sketchy in nature. Internationally hedge fund industry is growing faster, where most of the firms are found in developed countries. To make financial market evolve in a systematic efficient manner, key regulations must be implemented making a country compete successfully globally. Currently, in most countries, regulations on hedge fund have not been successful. This brings an urgent urge to bring forefront regulations regarding the industry. The industry gives talented fund managers opportunities to create value by exploiting prices inefficiencies in the stocks, bond, currency or contract markets.
In many countries, new laws have been made on registration and regulation of hedge funds. In the past years, funds managers exception to regulation allowed them to engage in other investment criteria, different from mutual funds. Mutual funds are registered by the companies and investment Acts in different countries while hedge funds manager remain secret on their position and decisions in the financial market (Astarita, 2006). Regulation on investments places certain important restrictions on transactions to be undertaken. These significant transactions are the inner core of hedge funds trading operations in the market. These transactions which are regulated on all investments poses a question on whether regulations on hedge funds managements are necessary. The most used strategy transactions by hedge fund is selling on long and short term debts to reduce risks. In most cases, the industry trade on all investment assets ranging from traditional financial stocks i.e. shares, bonds and currencies to non financial assets.
Most hedge funds are structured as limited partnerships this makes it to enjoy complete ownerships and management separation. Unlike other companies, their management structure is distinctive in that no shareholder is needed to approve on actions of board of directors. This means the industry does not comply with the independence on board of directors required by companies and investment Acts. From the investment advisors Acts the partners in hedge funds meets the clear definition of investment advisors. These investment advisors must be registered under the investment advisors Act to prohibit them from fraudulent engagement or trading practices e.g. inside trading in quoted limited companies. Financial investment advisor is defined as any person who advise on business matters directly or through writings on value of securities, purchasing, or selling securities on a fee as compensation (Modise Nupen, 2007). In recent past and up to today, hedge funds were seen as private funds which were exempted from registration under either company
Act or investment Act. It was seen as a pool of partners of less than hundred investors with resources, or has skills and expertise on investment issues. Thus, the organization form in hedge fund industry shields it from registration. Registration on investment advisors was also based on the number of clients the advisor has. Traditionally, hedge funds are required to have less than fifteen clients to be exempted from registration as investment advisors (Modise Nupen, 2007).
In many nations, hedge funds are seen as fraudulent businesses which use clients money to make their own profits without justification. However, the question remains as, there is fraud in the industry and does it need more control and regulation This calls for more regulations in the industry just like in other industries where investigations are made on firm dealings. Even if the industry is exempted from registration, it is taken as corporate individual, subjected to investigation if they commit frauds on securities, bonds or any other dealings.
Lack of regulation in the industry has contributed to uncertainty growth is not consistently progressing and leaves investors in panic for the deterioration of financial markets. Hedge funds are regulated by boards in many countries and usually there is no hedge funds approval on the regulation. This brings attention to formulation and implementation of new laws regarding hedge fund operations through entrenching them in constitutions and international treaties. Acts should be designed to require hedge funds managers as it is to financial intermediaries and facilitators in the financial market meet certain qualifications, so as to improve transparency and certainty for investors (Astarita, 2006). Proposals are made world wide to restructure hedge funds to invest in securities like any other intermediary.
This will allow hedge funds to be seen as separate schemes of investment portfolio. The merit on this will be that hedge funds will have defined types of assets to invest in. Further, new regulation will improve on international foreign schemes on financial investment globally. Implementing necessary regulations on hedge fund will build up balanced portfolios reducing risks and market volatility which in turn increase returns. Also, having variety of investment styles provide investor with choices to meet their financial objectives and can diversify from the traditional investment criteria (Modise Nupen, 2007).
Some of liquidity provided by hedge funds in markets may evaporate if regulation is not implemented successfully. Therefore, the traditional regulatory practice by many countries on hedge funds contributes a lot to the challenges of fund managers regulation in the international market. It should be noted that investors must understand risks and market volatility because changing regulation or coming up with advanced regulations for hedge fund will not reduce risks associated with financial investment.
This puts firms in an edge to manage different risks that may prevail on their operations. These risks may include financial risks, liquidity risks, inflation risks, market risks, economic risks, credit risks, unsystematic risks, business risks, purchasing power risk, currency risk among others(Baums Cahn, 2004). Risks are all likelihood or probability of a loss in future. Risks can result from internal conditions or factors as well as external factors that may have a negative impact to operations or profitability of an organization in the business community. All these make a company or a firm to take measures either to reduce risk or to diversify its operations to manage all potential risks (Baums Cahn, 2004).
Hedge Funds
Risks management entails dealing with risks by accepting risks, transferring risks, reducing them, or eliminating them using appropriate control measures and implementing strategies to deal with risks. Globalization in business operations has ensured that risk does not only affect one company, but all, countries, and continents at large. This risk practice calls for ways to deal with risks internationally. One of the international appropriate and recommended methods of dealing with risks is through hedging.
Hedging refers to the appropriate positions taken by a firm, establishing in a market to offset occurrence to prices fluctuations. Financial hedging involves taking strategies to reduce risk by making transactions in one investment to protect loss of the other i.e. balancing Portfolios. Due to a high desire to reduce risks by companies internationally, using hedging method businesses has erupted to diversify and reduce risks at a fee.
These firms are called hedge funds. Hedge fund are funds used to buy and sell undervalued securities, contracts, currencies and bonds, taking opportunities in any market either bearish or bullish to reduce risks for maximum gains. Hedge funds are investment portfolios that utilizes investment strategies like, selling short shares in a bearish market, exploiting price differences of different securities, trading options on contracts that depend on future fixed security performance, investing in anticipation for either a merger, hostile take over or buy outs, or purchasing discounted securities from firms that are suffering from financial distresses. In all these strategies, hedge funds benefits due to their non correlations in securitiesequity trading (Modise Nupen, 2007).
Market volatility reduction and risks reduction is the single most, important and primary objective of hedge funds. They do this without reducing their capital base and still make positive returns under all trading conditions.
Different hedge fund uses different strategies to meet their aims of good returns and reducing volatility or risks. Thus, they use appropriate strategies to suit their type of investment. Some may adopt strategies to make steady returns irregardless how the market is performing while others try to make higher than expectations and maintain some market exposures.
When forming hedge fund, it is strictly prohibited to have public offering or any kind of advertising and one is supposed to secure investor in word of mouth, brokers, or registered representatives (Astarita, 2006). Hedge funds were created more than fifty years ago. These are unregulated institutions with information which is mostly not available or it is sketchy in nature. Internationally hedge fund industry is growing faster, where most of the firms are found in developed countries. To make financial market evolve in a systematic efficient manner, key regulations must be implemented making a country compete successfully globally. Currently, in most countries, regulations on hedge fund have not been successful. This brings an urgent urge to bring forefront regulations regarding the industry. The industry gives talented fund managers opportunities to create value by exploiting prices inefficiencies in the stocks, bond, currency or contract markets.
In many countries, new laws have been made on registration and regulation of hedge funds. In the past years, funds managers exception to regulation allowed them to engage in other investment criteria, different from mutual funds. Mutual funds are registered by the companies and investment Acts in different countries while hedge funds manager remain secret on their position and decisions in the financial market (Astarita, 2006). Regulation on investments places certain important restrictions on transactions to be undertaken. These significant transactions are the inner core of hedge funds trading operations in the market. These transactions which are regulated on all investments poses a question on whether regulations on hedge funds managements are necessary. The most used strategy transactions by hedge fund is selling on long and short term debts to reduce risks. In most cases, the industry trade on all investment assets ranging from traditional financial stocks i.e. shares, bonds and currencies to non financial assets.
Most hedge funds are structured as limited partnerships this makes it to enjoy complete ownerships and management separation. Unlike other companies, their management structure is distinctive in that no shareholder is needed to approve on actions of board of directors. This means the industry does not comply with the independence on board of directors required by companies and investment Acts. From the investment advisors Acts the partners in hedge funds meets the clear definition of investment advisors. These investment advisors must be registered under the investment advisors Act to prohibit them from fraudulent engagement or trading practices e.g. inside trading in quoted limited companies. Financial investment advisor is defined as any person who advise on business matters directly or through writings on value of securities, purchasing, or selling securities on a fee as compensation (Modise Nupen, 2007). In recent past and up to today, hedge funds were seen as private funds which were exempted from registration under either company
Act or investment Act. It was seen as a pool of partners of less than hundred investors with resources, or has skills and expertise on investment issues. Thus, the organization form in hedge fund industry shields it from registration. Registration on investment advisors was also based on the number of clients the advisor has. Traditionally, hedge funds are required to have less than fifteen clients to be exempted from registration as investment advisors (Modise Nupen, 2007).
In many nations, hedge funds are seen as fraudulent businesses which use clients money to make their own profits without justification. However, the question remains as, there is fraud in the industry and does it need more control and regulation This calls for more regulations in the industry just like in other industries where investigations are made on firm dealings. Even if the industry is exempted from registration, it is taken as corporate individual, subjected to investigation if they commit frauds on securities, bonds or any other dealings.
Lack of regulation in the industry has contributed to uncertainty growth is not consistently progressing and leaves investors in panic for the deterioration of financial markets. Hedge funds are regulated by boards in many countries and usually there is no hedge funds approval on the regulation. This brings attention to formulation and implementation of new laws regarding hedge fund operations through entrenching them in constitutions and international treaties. Acts should be designed to require hedge funds managers as it is to financial intermediaries and facilitators in the financial market meet certain qualifications, so as to improve transparency and certainty for investors (Astarita, 2006). Proposals are made world wide to restructure hedge funds to invest in securities like any other intermediary.
This will allow hedge funds to be seen as separate schemes of investment portfolio. The merit on this will be that hedge funds will have defined types of assets to invest in. Further, new regulation will improve on international foreign schemes on financial investment globally. Implementing necessary regulations on hedge fund will build up balanced portfolios reducing risks and market volatility which in turn increase returns. Also, having variety of investment styles provide investor with choices to meet their financial objectives and can diversify from the traditional investment criteria (Modise Nupen, 2007).
Some of liquidity provided by hedge funds in markets may evaporate if regulation is not implemented successfully. Therefore, the traditional regulatory practice by many countries on hedge funds contributes a lot to the challenges of fund managers regulation in the international market. It should be noted that investors must understand risks and market volatility because changing regulation or coming up with advanced regulations for hedge fund will not reduce risks associated with financial investment.
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