Handbook of Critical Issues in Finance
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Handbook of Critical Issues in Finance

Edited by Jan Toporowski and Jo Michell

This vital new Handbook is an authoritative volume presenting key issues in finance that have been widely discussed in the financial markets but have been neglected in textbooks and the usual compilations of conventional academic wisdom.
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Chapter 21: Hedge funds

Photis Lysandrou


Hedge funds belong to that group of non-depository financial institutions that merely perform a ‘transfer’ function, in that assets placed under their management by clients are redeployed with the aim of generating better returns subject to a given level of risk than is possible for those clients. This said, hedge funds differ from other investment firms such as pension and mutual funds in three important respects: they are not required to maintain the same high level of transparency regarding their actions; they are not subject to the same regulatory constraints on the types of investment activities that they can engage in or on the types of investment tools that they can use; and, finally, they are not obliged to factor risk on anything like the same scale into their return-generating strategies, a feature that explains why the latter are often classified as ‘absolute return’ strategies. The characteristics that distinguish hedge funds from other institutional asset managers are also those that have drawn the latter into rapidly expanding their investments in hedge funds over the past decade.

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