The reason behind this is that hedge funds are not going to disappear, and people have to understand how they work and what they are for so that they do not harm their own investments or others' investments moving forward. It is possible that, in the future, new and better ideas for pension funds and hedge funds will come about.
Also important is being able to identify the people who are most at risk for losing money (i.e. losing their pension funds) when they involve themselves with hedge funds. Not all fund opportunities work in the same way, and people with pension funds should certainly understand that hedge funds may not work in the same way that they expect them to, and that those who are brokers for hedge fund opportunities may not spell out all of the specifics.
With that in mind, two people may go through the same basic hedge fund manager, but one may be perfectly fine afterward and one may have many problems associated with the experience. The difference between the two could be caused by many things, including the person's view of the hedge fund opportunity, what the market has done, and whether the fund manager was actually clear in explaining how hedge funds and pension funds work, as well as countless other issues.
This study is important to the future of this kind of research because it will give a great deal of insight into the topic and discuss many of the concerns that exist now and the different options that are being used to address those concerns, as well as what is being considered for the future of the field where both pension funds and hedge funds are concerned. It will also show similarities and differences between hedge funds and pension funds so that there is a clearer understanding of the issues surrounding the study. One of the main reasons why this comparison is so important is that individuals can sometimes easily misunderstand the differences between the two, and if they are not clearly explained by a knowledgeable person, the investors financial future can be put at risk.
Naturally, it can be seen how this would be a concern, and therefore hedge funds must be carefully studied and separated from pension funds, which may seem similar in many cases to those who are not trained in these matters. The literature review will look more closely at the comparison thereof, among many other things.
Hypothesis
The unregulated nature of hedge funds allows for management freedom with regard to the investment strategies, asset classes, leverage, shorting, and derivative use. On the other hand the low transparency, lack of standards measuring risk and return, and serious data problems involved in the hedge fund databases masks the risks involved in investing in hedge funds (Schachter, 2004). Based on that information this paper will look at the following hypothesis to determine whether it is valid or invalid:
Since risks with hedge funds are unclear hedge funds cannot be used to lower the overall risk in a pension fund portfolio, therefore, they are not suitable investment vehicle for pension funds.
Objectives
The objectives of this thesis include defining 'hedge fund' and 'pension fund' and showing what is hiding behind those generic terms. Here the structural configurations of both hedge funds and pension funds will be explained along with their different restrictions. The researcher will continue by demonstrating why pension funds seek to invest in hedge funds and what benefits can be gained from doing so in terms of risk and return. In addition, the researchr will mention the variety of risks involved in investing in hedge funds, and illustrate the variety of database biases that plague the hedge fund industry. Once the basis of understanding has been established, different methods to calculate risk will be illustrated.
In the empirical section, a case study will be conducted to show how hedge funds can be used to optimize the pension funds risk and return profile. To begin, one risk parameter and a series of different hedge funds following different investment strategies will be selected. The thesis will continue by analyzing the results of the case study with respect to risk and return.
The researcher will conclude the thesis by exploring whether hedge funds can be used to lower the overall risk of pension funds. Should the research show that hedge funds do lower the overall risk, the extent to which the hedge fund has lowered the overall risk of the pension fund will be addressed. Though hedge funds appear to have the tools for following absolute return strategies, they may not be as low-risk as their name suggests. Therefore the researcher will conclude with whether...
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