HEDGE FUNDS AND THEIR IMPACT ON

THE FINANCIAL MARKETS.

Hedge funds are now one of the most popular in financial circles or in anything
related to the broader economy. These funds, mysterious to the public, political,
and many investors, are often described, without the accusations against them
are targeted to be verified. This reflects a misunderstanding of the real mode of
operation of hedge funds and their impact on the economy.

For nearly twenty years, issues related to the operation of hedge funds and their
impact on markets and more generally on the financial systems are gradually a
field of study in its own right, rich body of literature. The term hedge fund means
hedge funds. The latter appeared on 1 January 1949 when a certain Alfred
W.Jones opened a formal background in action as a private company.

Its aim was to provide flexibility and maximum flexibility in the creation of a
portfolio. To increase profitability while reducing risk exposure in the market, Mr.
Jones took the positions of both buyer and seller, and had recourse to the
leverage to increase the performance of the securities.

It is difficult to define what a hedge fund to the extent that there is no real
definition, that is why we returned to the general definition of Capocci Daniel:

“A Hedge fund is a private investment using a wide range of financial instruments

such as short selling of equities, derivatives, leverage, arbitrage, and this in
different markets. Generally, the managers of these funds to invest part of their
resources and are paid according to their performance. These funds often require
high minimum investments and access is limited. They are particularly aimed at
wealthy clients, whether private or institutional. “ There is a difference between
hedge funds and mutual funds, they do not have the same characteristics as
those of hedge funds. The two most notable differences concern risk
management and the performance.
Indeed, hedge funds are much riskier than mutual funds, but this risk is paid
according to performance of these funds, hedge funds are characterized by low
regulation and transparency that makes them special and unique in their kind.The
hedge fund industry is growing rapidly in recent years. Estimates of

Hedge Fund Research (HFR), from 610 funds managing $ 39 billion in assets in
1990, they had risen to 3,873 and funds managed $ 490 billion ten years later. At
the end of the third quarter of 2006, 9,228 funds managed some 1 400 billion,
representing an annualized growth of their assets by 19% since 2000. Of this
total, over 1 000 billion are held by U.S. funds, 325 billion are managed in Europe
and 115 billion in Asia (Ferguson and Laster, 2007).

Based on these impressive results can not be removed is a simple conclusion is

that hedge funds play a large role in economic growth, and their profitability can
be classified as a stabilizing factor of the financial system. But what is meant by
financial stability? Mishkin defined it as ” … the prevalence of a Financial System
Able to Ensure Which is in a lasting way, and without major disruptions, an
efficient allocation of savings to Investment Opportunities. “

Ie that the prevalence of a financial system that is able to ensure a sustainable

manner, and without major disruptions, an efficient allocation of savings to
investment opportunities.

Indeed, this contribution is measured by injecting liquidity in large volumes, the

price discovery and spread of risk that enhance the efficiency of financial markets
and here we talk about hedge funds as a stabilizer system Financial.

On the other hand, we keep seeing reviews that accuse hedge funds of being
propagators of crisis and financial instability, the least we can say that this is a
subject ready to controversy. Especially after the last two crises, those of LTCM
and the real estate, hedge funds were the first to blame for this and they are still
considered as investment funds are very sophisticated and very speculative
meaning they are attached to liquidity risk and systemic risk as a result, the
hyphen is the hedge fund factors destabilizing financial markets.

In this regard will be developed in the following the following problem:

What is the impact of hedge funds on financial markets.

The answer to this question will be taken in two parts:

In the first chapter, we develop the contribution of hedge funds to see them as
instruments of efficient markets.

In the second chapter will analyze the antithesis, the role of hedge funds as
destabilizing the financial system.

I - Hedge fund market stabilizer:

Since the 90s, hedge funds have experienced a great attention from central
bankers and supervisors with their role in the functioning of financial markets and
this is due to growth in assets managed by these funds and the diversity of their
strategies.

“The hedge fund industry has grown strongly and hedge funds have become an
increasingly important diversification for investors and liquidity for the markets.
The institutionalization and increasing customer sophistication of management
and risk controls within the largest hedge funds have, in many ways, contributed
make them important players in financial markets. “

(Draghi 2007, p.44)

Adaptation between the financial market and hedge funds is an effect, must be
recognition of the blessed formed by hedge funds on financial market efficiency
(2007 Walnut)

The atypical nature of hedge funds has raised many questions about the
consequences of their activity in financial markets. The positive roles that they
attribute are relatively well identified. Thus it is accepted to participate, by the
discovery of good equilibrium prices, greater market efficiency, they contribute
importantly to provide liquidity, and finally they have developed the Credit
derivatives allowing better risk sharing. (Meier and Nagel 2004). But hedge funds
vary greatly in size and their strategies. Any generalization about them seems
difficult. The many improvements in market practice and supervision have allayed
concerns about stability, but the increasing complexity of products and markets
creates new challenges (Draghi 2007).

So, although they are considered the most risqué funds are also considered an
innovation in the market; hedge funds have helped to ensure financial market
stability.

II – Hedge fund marker destabilizers:

We saw in the previous chapter how hedge funds are primarily used to generate
streams of wealth over time and contribute significantly to the efficiency of
financial markets, but they can however be weapons of economic warfare.

These funds are financial operators using unusual strategies that may have
destabilizing consequences for both target markets for businesses.

Hedge funds are very competitive, and always have ample access to capital, then
they proceed to arbitration, so the competition among them ensures that they
exploit the financial anomalies to eliminate them as they are also the origin of
these anomalies playing a role in infection by the techniques of dynamic hedging
and risk.

It is not easy to analyze the hazards in the case of investment in hedge funds, as
seen following the strategy, the risks can be totally different. Significant risks for
certain strategies are fully covered in other and vice versa.

That is why it’s of utmost importance that we are aware of the factors that affect
the hedge funds themselves, whether they are stabilizers of destabilizers in order
to generate as much wealth as possible on the long term, and also keep it
sustainable with certain market strategies affected by the factors discussed in this
essay.