Long-Term Capital Management, Lp. (a)
Long-Term Capital Management, LP. (A)
(HBS Case No. 9-200-007)
Long-Term Capital Management, LP. (A)
Hedge Funds
According to the book, “Financial Markets and Institutions” by Anthony Saunders, hedge funds are financial intermediaries that pool the financial resources of individuals and companies and invest those resources in (diversified portfolios of assets. In other words, they are a type of investment pool that solicit funds from (wealthy) individuals and other investors (e.g., commercial banks) and invest these funds on their behalf.
They are also similar to mutual funds in that they are pooled investment vehicles that accept investors’ money and generally invest it on a collective basis. However, hedge funds are not required to register with the SEC.
Hedge funds are also not subject to the numerous regulations that apply to mutual funds for the protection of individuals, suck as regulations requiring a certain degree of liquidity, regulations requiring that mutual fund shares be redeemable at any time, regulations protecting against conflicts of interest, regulations limiting the use of leverage (Saunders, p. 490).
Further, hedge funds do not have to disclose their activities to third parties. Thus, they offer a high degree of privacy for their investors. Hedge funds offered in the U.S avoid regulations by limiting the number of investors to less than 100 individuals (below that required for SEC registration), who must be deemed “accredited investors.” To be accredited, an investor must have a net worth of over $1 million or have an annual income of at least $200,000 ($300,000) if married). These stiff financial requirements allow hedge funds to avoid regulation under the theory that individuals with such wealth should be able to evaluate the risk and return on their investment. According to the SEC, these types of investors should be expected to make more informed decisions and take on higher levels of risk (Saunders, p. 512).
(HBS Case No. 9-200-007)
Long-Term Capital Management, LP. (A)
Hedge Funds
According to the book, “Financial Markets and Institutions” by Anthony Saunders, hedge funds are financial intermediaries that pool the financial resources of individuals and companies and invest those resources in (diversified portfolios of assets. In other words, they are a type of investment pool that solicit funds from (wealthy) individuals and other investors (e.g., commercial banks) and invest these funds on their behalf.
They are also similar to mutual funds in that they are pooled investment vehicles that accept investors’ money and generally invest it on a collective basis. However, hedge funds are not required to register with the SEC.
Hedge funds are also not subject to the numerous regulations that apply to mutual funds for the protection of individuals, suck as regulations requiring a certain degree of liquidity, regulations requiring that mutual fund shares be redeemable at any time, regulations protecting against conflicts of interest, regulations limiting the use of leverage (Saunders, p. 490).
Further, hedge funds do not have to disclose their activities to third parties. Thus, they offer a high degree of privacy for their investors. Hedge funds offered in the U.S avoid regulations by limiting the number of investors to less than 100 individuals (below that required for SEC registration), who must be deemed “accredited investors.” To be accredited, an investor must have a net worth of over $1 million or have an annual income of at least $200,000 ($300,000) if married). These stiff financial requirements allow hedge funds to avoid regulation under the theory that individuals with such wealth should be able to evaluate the risk and return on their investment. According to the SEC, these types of investors should be expected to make more informed decisions and take on higher levels of risk (Saunders, p. 512).