Today, generic term for globally operating risk funds, namely capital management companies, which are mainly characterized by the following features: – they explicitly aim for outstanding market success. To achieve this, they track down overvalued or undervalued (traded below its real value, although it is always problematic to determine a “real” value) assets of all kinds; viz: the fund seeks to discover and profitably exploit market inadequacies; – the investors are a narrowly defined number of institutional investors – namely banks, companies and other funds – or wealthy individuals; – the investors’ deposits are usually tied up for a long time – usually up to three years – which allows the fund management to focus its strategy on longer periods; – they are not (yet) subject to direct supervision by authorities and therefore prefer to be domiciled in offshore locations (tax havens); – they react extremely flexibly; the management can usually choose investment markets, instruments and strategies fairly freely; – the managers’ compensation is largely performance-based, whereby the managers themselves usually have to hold a relatively high equity stake and their profit entitlement is often linked to the compensation of losses incurred beforehand; – in order to increase the expected return, credit-financed funds are often also used (leverage); in some cases, four-fifths of commitments are financed with borrowed capital, thus creating a very high leverage effect; – the managers of the funds exert pressure on the companies in their investment area and force them to a best performance of the management, which is often unfit and therefore incapable at the time of the investment; – by means of outsourcing all administrative tasks to a bank – called brokerage business there – the fund can be managed with only very few personnel. – Hedge funds can thus be seen as an intermediate, a hybrid between a bank and an investment fund. – Central banks view hedge funds with suspicion because they are generally very sensitive to shocks, and the risk of illiquidity and insolvency is therefore particularly high; in 1998, for example, the globally operating hedge fund LTCM brought the world financial system to a crisis. George Soros’ Quantum Fund (Soros is considered to be the one who made hedge funds marketable in the first place) even forced the GBP to devalue in 1992 (Soros speculation). – The BIS has been trying for years to bring hedge funds under international supervision rules. At the beginning of 2007, about thirty percent of the world’s invested capital was in about 9,200 hedge funds. But only about thirteen percent of hedge funds managed more than $500 million in assets at that time. About thirty percent of the funds ranged between USD 25 million and USD 100 million. The attrition rate for hedge
funds worldwide is given as thirty percent for the years 2000 to 2006. – In the course of the financial crisis that followed the subprime crisis, about a quarter of all hedge funds disappeared; at the same time, assets under management plummeted by about forty percent. – According to estimates, the largest 100 hedge funds – just under one percent of the total number – accounted for two-thirds of the total assets managed by hedge funds in 2012. – In Germany, hedge funds are legally called “special assets with additional risks” and are defined in Section 112 InvG as “investment assets that observe the principle of risk diversification and are otherwise not subject to any restrictions in the selection of assets (…) within the scope of their investment strategies.” – See actuary, cannibalization, over-the-counter, bank regulatory paradox, supervision, indirect, brokerage, club deal, convertible arbitrage, Counterparty Risk Management Policy Group, loan versus paper, deleveraging, domino effect, formulas, financial mathematical, leverage(effect), hedge fund supervision, hedge fund dangers, locusts, Hudle Rate, Index Arbitrage, International Organization of Securities Commissions, Capital Tapping, Credit Derivative, Legal Opinion, Leverage Theory, Long-Short Arbitrage, Non-performing Loans, Over-the-Counter Trading, Ranking Theory, Single Hedge Funds, Soros Speculation, Asset Value Investors, Value Management, Asset Portfolio, Zombie Bank, – Cf. Monthly Report of the Deutsche Bundesbank of March 1999, pp. 31 ff. (Role of hedge funds in the financial markets: detailed account; overviews), Annual Report 2001 of the Federal Supervisory Office for Securities Trading, pp. 9 f., Annual Report 2003 of the Deutsche Bundesbank, p: 48, Annual Report 2003 of BaFin, pp. 211 ff. (recent legal developments; supervisory implications), Annual Report 2004 of BaFin, pp. 18 ff. (fundamental issues; originators of systemic risks), pp. 145 f. (risk management in insurance companies holding shares in hedge funds), pp. 182 ff. (issues of supervisory approval), Annual Report 2005 of BaFin, pp. 152 (risks posed by hedge funds), BaFin Annual Report 2006, pp. 159 f. (supervisory visits; special audits), pp. 171 f. (uncovered cases of market abuse), BaFin Annual Report 2009, p. 43 (efforts toward supervisory registration), p. 221 (supervisory visits by BaFin), BaFin Annual Report 2009, pp. 43, 221 f. (efforts toward stricter regulation), Annual Report
2010 of BaFin, pp. 239 f. (share of hedge funds in Germany minimized; international regulation sought; AIFM Directive) as well as the respective annual report of BaFin, chapter “Supervision of Securities Trading and Investment Business,” Monthly Report of the ECB of January 2006, pp. 71 ff. (broad, textbook presentation; valuable overviews), Deutsche Bundesbank Monthly Report of July 2008, p. 25 f. (increasing importance of hedge funds from an international perspective; overviews; literature references), Financial Stability Report 2012, p. 67 ff. (shadow banking sector as a whole and its risks), BaFin Annual Report 2012, p. 206 (number of licensed funds). – The Deutsche Bundesbank’s monthly statistical supplement “Kapitalmarktstatistik” also provides figures on the number, outstanding shares and assets of domestic hedge funds (domestic mutual funds), broken down by various aspects.
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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