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HEDGE FUNDS
THEIR ROLE AND INFLUENCE IN TODAY'S FINANCIAL MARKETPLACE

"Hedge Fund" is an often used expression, but surprisingly, one without even a generic meaning. It is a term that has been used to describe an undercapitalized individual trader actively buying and selling new issues for his own account as well as a multibillion dollar limited partnership whose general partner has carte blanche to transact deals for the group, with the intent that he maximize the partnership's profits. Hedge Fund transactions may include the purchase and sale of any form of security or commodity, long or short, equity or debt, passively or with the view of taking control. All of the foregoing can be executed in almost any combination. This memorandum primarily addresses the most common security oriented, capital pools which are also those receiving the most notoriety.

Hedge Funds come in all sizes and shapes, from the now fledgling Dome Capital Management, currently raising money to do "Day Trading," to the $20 Billion off-shore Quantum Fund, run by George Soros, which does not accept American Investors. There are Hedge Funds that specialize in such esoteric fields as Junk Bonds, Derivatives, Currency Trading, Geographic Areas, and even Hedge Funds whose raison d' etre is the investment of partner's funds in other Hedge Funds. A January 21, 1992 article in Financial World points out that the pension funds of Harvard, Stanford, Duke and the United Mine Workers are either invested in Hedge Funds or at least are considering them as AN alternative financial tool.

Contrary to popular regulatory misconceptions, a Hedge Fund does not necessarily have to be a limited partnership to be recognized as one by "The Street". This inadequate definition is the consequence of insufficient knowledge regarding the scope of activities engaged in by sole proprietors performing similar functions.

The larger Hedge Funds aggressively compete for new dollars, trumpeting their heroics to a cult of sophisticated gamblers looking for the hottest hand in town. The smaller sole proprietorships use their own funds and prefer to blend into the background. Only the brokers receiving their business know who they are and the scope of their operations.

Whether they work alone or in concert, Hedge Funds exert enormous influence over all phases of the financial marketplace, at times creating turmoil unparalleled in the financial world. The earlier a potentially profit making opportunity can be uncovered, the greater the probability of beating the competition to the quarry. The combined assets of these funds most certainly number in the hundreds of billions of dollars, and because of their unregulated nature, they are able at times to hold large investment banking firms in virtual servitude for past or future favors.

Before proceeding further let us define this amorphous creature that we refer to in this article as a "Hedge Fund", understanding that the term is applied by "The Street" to any entity that acts in mysterious ways. My definition of the term would be: a pool of aggressively managed funds whose scope of investment in financial instruments is limited only by the terms and conditions of its charter (most of the time) and the ego of its management.

Most of the major Hedge Funds will generally not pursue a prospective investor unable to risk seven figures. This is not true of Multimanager funds, which invest their limited partner's assets in a multitude of funds, hoping to both spread the risk and give the "small investor", a chance to play in the big leagues. Because Multimanager Hedge Funds charge very high management fees and levy substantial assessments, they must demonstrate extraordinary performance. Added to these fees are those charged by the Hedge Fund itself, creating enormous baggage for the investor.

Further complicating the investment decision, unregistered Hedge Funds with less than one hundred investors are exempt from a public reporting requirement. When superior results are attained, the fund management will arrange press conferences to bombard the public with their results. Under-performance is accompanied by evasion and silence. This lack of regulation and selective reporting fosters fraud. One manager broadcast substantial trading profits during a period when he had actually wiped out the majority of the Fund's investors. The "Alice and Wonderland" performance, though unverifiable, continued to attract gullible participants.

Hedge Funds Endnotes

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