Reasons for Growth of Hedge Funds
Many Hedge Fund strategies have the ability to generate positive returns in both rising and falling equity and bond markets. Inclusion of Hedge Funds in a balanced portfolio reduces overall portfolio risk and volatility, and increases returns. Huge variety of Hedge Fund investment styles - many uncorrelated with each other - provide investors with a wide choice of Hedge Fund strategies to meet their investment objectives. Various researches prove that Hedge Funds have higher returns and lower overall risk than traditional investment Funds. Hedge Funds provide an ideal long-term investment solution, eliminating the need to enter and exit the markets repeatedly. Adding to these, having Hedge Funds in an investment portfolio provides diversification not otherwise possible in traditional investing. Beyond investor demands, there are other factors also that drive the growth of Hedge Fund industry; they include:
Low Barriers to Entry: Apart from a few regulatory requirements and relatively low start-up costs, the barriers to entry are insignificant.
Attractive Compensations System: The compensation structure common to Hedge Funds attracts and retains investment professionals. As in a limited partnership, a typical fee arrangement for Hedge Funds is 1 to 3 percent of the capital committed plus 15 to 25 percent incentive for the above average performance, which is more than the fees charged for most traditional active equity products.
Intellectual Freedom: Investment professionals are attracted by the freedom to manage assets without any constraints that clients impose. This combination of reward and freedom is attracting many managers to become part of the growing Hedge Fund industry.
Improved Industry Infrastructure: Meanwhile, the infrastructure for Hedge Funds has become more robust in the form of improved Fund administration, auditing, prime brokerage, and the development of investible benchmarks. These facilitated managers to form new Hedge Funds as well as provide healthy returns, to investors who adopt Hedge Funds.