With Risk Comes Reward, And Risk

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Hedge funds have been getting a ton of notoriety lately because of their gigantic returns and people are going nuts over them and their fantastic returns. The short description of a hedge fund is that a limited number of individuals (accredited investors) are allowed to invest in a hedge fund and, because they are open only to accredited investors, they aren’t regulated by anyone such as the SEC. As such, they are basically free to invest whatever they want (subject to whatever agreements they made with investors) and they’re paid based on asset size and performance and they’re paid very handsomely. They’re generally riskier than a mutual fund but usually you don’t care because you want the rewards.

With risk, comes reward. And for the poor souls who invested in Bear Stearns’ High-Grade Structured Credit Enhanced Leveraged Fund and High-Grade Structured Credit Fund, they were told last week that they done. Finished. The High-Grade Structured Credit Enhanced Leveraged Fund was now worthless, losing essentially all $638 million, and the High-Grade Structured Credit Fund lost 91% of its $925 million – all because they were highly leveraged in the sub-prime lending industry. For those of you keeping score at home, that’s over $1.4 billion dollars lost. One point four billion dollars.

With risk comes reward… but don’t forget the risk.

Accredited Investor: In the US, for someone to be an accredited investor, they must satisfy some qualifications according to the Securities Act of 1933. The qualifications are that you must have net worth of $1M or have made at least $200k each of the last two years ($300k if you’re married) and can expect to earn that much this year.

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4 Responses to “With Risk Comes Reward, And Risk”

  1. AndyM says:

    The accredited investor net worth excludes the primary residence.

  2. Lord says:

    SEC just voted to increase it to $2.5MM I believe.

  3. BackOfficeMonkey says:

    Who saids all hedge funds are the same?

    Why would these two Bear Stearns Hedge funds whom were heavy invested in the “equity tranches” of CDOs have the same risk structure as a long short equity fund that are market neutral? They don’t.

    More often then not these hedge funds are investing in the very same underlying asset classes as regular old boring mutual funds except they slice and dice risk differently.

    One of the challenges in the investment management industry is to replicate popular hedge fund strategies passively. Oddly enough they are trying to package what’s ment to be alpha as another beta source.

    – BOM

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