Hedge Fund Management Industry Trends

Credit Risk Transfer from Banks

Because of the appetite of hedge funds for high-yielding investments, banks and investment banks have been able to transfer credit risk from illiquid loans they previously had to hold themselves. By securitizing such illiquid loans and selling the high-yield, high-risk tranches to hedge funds, banks have reduced the amount of credit risk they hold. Hedge funds now hold the credit risk for many illiquid investments, such as commercial loans and sub-prime mortgages.

Rapid Growth of Hedge Fund Industry

The amount of money hedge funds manage has grown rapidly in recent years. The Federal Reserve estimates that hedge fund assets grew from $400 billion in 2000 to $1.4 trillion in 2006; the number of hedge funds grew from 3,000 to 9,000.

Institutions Become Hedge Fund Managers

The rapid growth of the hedge fund industry in recent years is partly due to the interest of financial institutions in becoming hedge fund managers. Many of the large investment banks, such as Goldman Sachs and Bear Stearns, operate in-house hedge funds, partly to take advantage of their in-house analytical expertise, partly to provide investment opportunities for their large institutional and individual customers.