Hedge Fund Failures: A Computational Analysis of the Sources of Risk
It is imperative to understand the role of Hedge Funds in the financial sector today, and how they have, over time, played significant roles in the collapses of some major companies and financial crises.
1. Principles and History of Hedge Funds
Hedging refers to techniques employed to mitigate risk, usually by taking positions whose values move inversely with that of the positions being hedged.
A.W. Jones & Co. started the first investment fund that was truly a hedge fund in 1949. The fund implemented a long/short equities by hedging their long positions with short positions in other names. Leverage was also employed. It grew thanks to the incentives offered to investors.
The Goal is to achieve greater than average absolute returns as a meaningful way for wealthy investors to have a unique means of investing above the normal selling and buying found on typical exchange floors.
The Case of Liquidity
Liquidity is the same with any other kind of investment, and in the case of hedge funds, there is often a limitation on how someone can liquidate their assets that are held in a fund. This could create situations of panic and over-reliance on leverage — using money or…
