The role of hedge funds in the global economy | FlexFunds (2024)

• This article provides information on hedge funds, what they are, and how they impact the global economy. It also discusses its importance in the investment market and its potential to pose risks to financial stability.
• The information in the article is relevant because it helps readers understand the importance of hedge funds in the global economy and how their operations can affect retail investors and other market participants.
• FlexFunds solutions allow hedge funds to securitize an existing fund cost-efficiently, facilitating access to international investors and expanding their distribution to private banking. Contact our experts to find out how it is possible.

Hedge funds impact supply and demand for assets

In the current globalized financial industry different investment vehicles influence the general behavior of the economy. Among the most important, hedge funds stand out.

What are hedge funds?

Hedge funds are investment vehicles that pool money for a positive return regardless of the primary trend of the markets in which they trade.

According to the United States Securities and Exchange Commission (SEC), hedge funds can achieve their objective through the use of leverage, short selling, and other speculative investment practices that conventional mutual funds can’t perform.

Usually, this type of financial instrument is available only to accredited investors, who have a high purchasing power and a certain level of knowledge in the matter.

“Typical investors include institutional investors, such as pension funds and insurance companies, and wealthy individuals,” summarizes the regulatory body.

The importance of hedge funds in the global economy

Today, hedge funds play an essential role in the global economy, mainly due to their large size. According to a Research and Markets report, the estimated hedge fund market will be around USD 1.05 trillion in 2023 and grow to USD 1.42 trillion by 2028 at a compound annual rate of 6.20%.

Consequently, its purchase and sale operations of financial assets and their derivatives can significantly impact their demand and supply, respectively, creating large-scale bullish and bearish impulses capable of affecting retail investors and other market participants.

“Hedge funds can pose a risk to financial stability when they use excessive leverage, adopt highly speculative strategies, or have a strong correlation with other market participants. The effects of these risks can quickly spread to other market participants and, ultimately, to the economy in general”, details the Financial Stability Board (FSB) in its report The role of hedge funds in the global financial system.

Hedge funds and financial stability

The financial stability risks posed by hedge funds were exposed during the famous 2008 credit crisis, which caused the S&P 500 stock index to collapse 58% in less than two years.

Specifically, many of these funds invested large amounts of money in subprime mortgage-backed assets, such as collateralized debt bonds (CDOs), which were based on subprime mortgage packages.

As borrowers began to default on their mortgage payments, the underlying assets’ value began to decline. As a result, many hedge funds that had invested in these assets suffered heavy losses and, in some cases, were even forced to close.

In addition, the massive sale of these assets by the institutions contributed to the fall in prices and the spread of the financial crisis to other markets, marking a before and after in modern economic history.

The impact of hedge funds throughout history

Although thousands of hedge funds have existed over time, the truth is that only a few have stood out for having impacted the global economy in some way.

For example, in 1998, Long-Term Capital Management collapsed and nearly sparked a global financial crisis due to its close connections to large banks and other institutional investors, high exposure to Russian debt, and excessively leveraged management.

On the other hand, Soros Fund Management, owned by legendary investor and philanthropist George Soros, was the fund that “broke the Bank of England” for participating in the massive sterling sale during the 1992 crisis.

As can be seen, hedge funds play a very important role in the global economy, mainly due to their large size, capable of impacting the prices of financial assets directly or indirectly linked to companies and savers.

These financial vehicles can be securitized through FlexFunds’ FlexFeeder, which will allow you to feed your fund cost-efficiently and facilitate access to international investors. If you want to know more about our solutions, please get in touch with us.

Sources:

• https://www.sec.gov/files/ib_hedgefunds.pdf
• https://www.researchandmarkets.com/reports/5755320/global-hedge-funds-market-category-type-end?utm_source=CI&utm_medium=PressRelease&utm_code=d8bh8t&utm_campaign=1835952+-+Global+Hedge+Funds+ Market+Report+(2023-2028)%3a+Emerging+Demand+for+Smaller+or+Newer+Fund+Managers+Drives+Growth&utm_exec=como322prd
• https://www.fsb.org/

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