Hedge fund and banking losses: A Systemic Risk Correlation?

The Hedge Fund is a fund that takes in the form of an investment fund of an individual that calls for performance and management fee. The fund is open to investors who qualify the requirements imposed and the fund actually accounts for more than 10 percent of the fixed income security of the United States. The hedge fund was created by Alfred Wilson Jones sometime in the year 1949 and the fund aims to offset the potential losses in the market where they invest by hedging the investments that they placed in a number of schemes and the most popular is through the short selling method.

Nonetheless, instead of really hedging the investment, the fund is known at present to be one that is not able to reduce the risk of investment but one that is rather more prone to risks. Likewise, there seems to be a notion of unknown transactions happening in a hedge fund due to its secrecy unlike most funds that are and should be kept open for public scrutiny. The hedge fund, according to Magnum, aims to reduce the volatile atmosphere and to preserve the capital and to be able to deliver positive results regardless of whatever market condition. According to the study, there are fourteen investment strategies that are used the hedge fund and each of these strategies offers different risks and returns. There is what is referred to as a macro hedge fund which includes investment on stocks and bonds market and currencies which aim to provide for bigger returns but is more volatile. There is also what is referred to as an equity hedge fund which can either be a global or a country specific fund. Among the salient features of a hedge fund regardless of the type is that the fund utilizes several financial instruments in order to reduce the risk and to enhance the returns and to minimize the relation between the bond markets and the equity. Hedge funds are also flexible and have high selling leverage. The funds also vary in terms of its volatility and its risks but the main goal is to be able to hedge against downturns in the market.

Nonetheless, like the common observation, BBC on "Hedge fund on verge of collapse", reported that Caryle Capital Corporation manifested to the public that the US mortgage supported bond fund will not be able to meet the demands of the lenders for money and that the fund will most probably collapse as well if the lenders would seize the remaining assets of the fund. The problem arose due to the credit crunch situation which likewise caused a number of turmoil against the banking institution and which the CCC recently faces. This is due to the fact that the international banks and the hedge funds which used to buy mortgage backed bonds which offered high yields and were considered as safe investments also suffer turmoil. At present however, the value of these bonds fell after high interest led a fall in the housing market especially in the sub prime sector that caters to clients that belong to the lower income and poor credit group. BBC correspondent revealed that many people are afraid that the hedge fund which borrows from banks would probably fail like most banking institutions.

The losses incurred by the hedge fund is generally attributed to the losses suffered by banking institution such that many believe that there is a huge correlation between the losses as the entire banking system is in panic and the global financial system is unstable.

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