The annual rich list of top hedge fund earners published by Institutional Investors features four hedge fund managers who made more than $$1$ billion in $2017,$ with other top hedge managers earning more than $65$ times the median pay of CEOs from the top $100$ US companies $($Frank$,2018).$ Investors are often mesmerised by these figures and take a plunge into the sector, relying on the stature and profile of these managers, which are often enhanced by the complexities of hedge fund strategies.

The role of regulators has always been crucial in determining the development of the industry. The scant regulation was one of the main elements that paved the way for the development ofthe industry.

According to industry estimates in $2008,$ the hedge fund industrys assets under management had grown to $$2\mathrm{.}5$ trillion, actually performing well during the GFC$.$ Regulatory bodies have moved to tighten their hold over the sector due to fears that a collapsing fund may damage the entire financial system. Frauds and Ponzi schemes that emerged after the GFC$,$ such as the Madoff investment scandal in late $2008,$ prompted further regulatory attention $($Cumming$,2010).$

Apart from the regulatory changes, the acceptability of exchange$-$traded funds and index funds proved detrimental to the hedge sector. In the words of Jack Bogle, investor and founder of Vanguard, In hedge fund investments, people have been paying very high fees for poor performance, which resulted in disenchantment, especially among institutional investors$.$ The dissatisfied customers were lured into the Exchange Traded Fund $($ETF$)$ industry which offered better returns with lower fees $($Chris$,2017).$

Despite the fact that the hedge fund sector is glorified by the large incomes earned by its most prominent fund managers, the overall trend is not positive, with the withdrawal of major investors including major pension funds such as Calpers. The legendary investor Warren Buffett, who has always been a strong critic of hedge fund managers and their promises of outperforming the market, made a bet with the fund manager Protg Partners in $2007$ that his S&P $500$ index fund would beat a basket of hedge funds. Buffetts index fund earned $7\mathrm{.}10$ per cent per annum over $10$ years, beating a return of $2\mathrm{.}20$ per cent per annum earned by the basket of hedge funds, winning a million dollar bet $($to be donated to charity$)$ in $2017($Akin$,2018).$

Discussion points

Highlight the reasons behind the success of hedge funds at the time of the sub$-$prime

mortgage crisis.

What are the aspects that necessitated strong regulatory involvement in the hedge fund

industry?

What are the factors that are causing a downturn for the hedge fund industry?

Answer rating: 100% (QA)

1 Reasons behind the Success of Hedge Funds during the Subprime Mortgage Crisis Hedge funds were successful during the subprime mortgage crisis for se... View the full answer