By 2007, after years of dramatic increases, the total assets invested in hedge funds rose to about $2.5 trillion. In 2009, due to losses and redemptions stemming from the current financial crisis, that total is likely to drop to $1 trillion or less. How strongly the industry will bounce back from its annus horribilis is unclear. The global economic environment itself will be a major factor, as will the prospects of additional regulation. But just as important will be whether the hedge-fund sector can heal its own self-inflicted wounds.
Hedge funds are often misrepresented as being risky, secretive, highly leveraged, and unregulated. In fact, most hedge funds are none of those things. They are generally transparent (at least to their investors), subject to significant regulation, and less risky than most other investment options. The high representation of hedge funds in institutional portfolios in recent years has been due not to faddishness or recklessness, but rather to a recognition by sophisticated investors that hedge funds have reliably delivered impressive absolute returns (at least until last year).
Moreover, there is no such thing as a typical hedge fund. Each fund tends to adopt a specific niche for its investments -- long-short equity, currencies, commodities, convertible debt,
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