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By Dimitris N. Chorafas (auth.)

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The reviewers made the following comments: ● ● ● Not every fund manager has an absolute return orientation, some have an index orientation. Not all geared instruments have in common sensitivity and exposure to the liquidity of markets. Lots of smaller company investments on recognised stock markets can be largely illiquid too. Are Alternative Investments Inherently Risky? 41 The statements in the first and third bullets are correct, except that an index orientation does not mean there is no risk.

This does not mean that credit institutions are not leveraged. Their leveraging can be computed through the level of reserve requirements implied by regulators. Commercial banks leveraging is, in principle, a mid-one-digit factor. By contrast, the leverage factor of many hedge funds is well above 50, or 5,000 per cent. Taking just 40 as a reference level, this would mean US$500 billion ϫ 40 ϭ US$20 trillion. This is above the total current capitalisation of US markets by an impressive margin. Heavily geared hedge funds must therefore be considered financial market movers rather than small market players.

Today, practically every major financial institution is becoming involved. Noteworthy is the domicile of funds of funds. 8 ‘We need to make the explicit point that the reason why most hedge funds cannot operate onshore is because they are heavily restricted (rules about shorting etc),’ said one of the reviewers. ’ Regulation and compliance to regulation is necessary to keep a sense of balance between risk and return. Traditionally secretive, hedge funds face big pressure from regulators and investors for more disclosure.

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