What is the role of hedge funds in the financial market

There has been rapid growth in the number of edge notes and their assets to a lower place management, suggesting they earmark economic value to investors that is not avail adequate to(p) in other investment instruments. Their main aim is to bowdlerize risk and volatility whilst attempting to preserve capital and deliver positive returns under all market conditions. They utilise a range of aggressive methods to invest in a wide array of assets to generate returns which gain a very low correlation with traditional asset classes, creating a diversifying effect on a portfolio.This means they get a constant level of return, regardless of what the market does. Hedge funds tip to be illiquid as investors are limited in terms of when and how much money they are able to take discover, therefore they are long term propositions. Originally, hedge funds were not subject to the open disclosure or regulatory reporting requirements that apply to other financial institutions, so they had little or no regulatory oversight. But since the financial crisis, more regulations have been introduced, such as reporting under AIFMD The Alternative Investment money Managers Directive.Also, from February 2014, they will have to report under Emir. Policy director in the BBAs Capital Market and Infrastructure division, Andrew Rogan, recently said If funds dont comply with Emir, there are real consequences to how a business can use derivatives to protect itself from risk and you whitethorn even be shut out of the market completely. The purpose of regulation is to protect investors. Although an element of secrecy between funds is kept in order to keep investment strategies to themselves, they cant do whatever they like with other peoples money, so regulation had to be introduced.Markets function best when investors use ifferent information and strategies to manage, or hedge against, risk. Private investment companies provide worth(predicate) liquidity to financial markets in nor mal market conditions. In Hands Off Hedge Funds, Sebastian Mallaby states that by buying irrationally cheap assets and selling irrationally expensive ones, they shift market termss until the irrationalities disappear, thus ultimately facilitating the efficient allocation of the worlds capital. (Mallaby, 2007). Consequently, hedge funds can be less volatile than separate stocks or mutual funds.With the freedom to nvest wherever the managers believe they can perform better than the market, hedge funds broaden the use of investment strategies, increasing the number of investors, and enlarging the capital pools available and strengthening capital markets. through with(predicate) flexibility, they are able to trade different securities in several markets at once, so opportunities for returns are maximised, meliorate risk management and encouraging innovation ot strategies, as well as financial products and services.There is also a competitive advantage as hedge funds attract human n d financial capital, bring to a stronger economy. They can act as an incentive for businesses and individuals to invest because they offer the chance for money to be invested in a range of products, free from fraud and over-regulation, and increases in investment can influence economic growth and stability. Hedge funds also improve the efficiency of capital markets by helping to price securities more accurately. This minimizes market distortions, which in turn leads to better allocation of capital, financing growth, innovation and Job creation.Short selling, for example, may be a technique used by hedge funds and is sometimes seen as vie an essential part of the price discovery mechanism. Some researchers believe short interest is an indicator of myopic stock performance, and that short sellers exploit market mistakes. Hedge funds have many different benefits such as diversification, flexibility and liquidity, but to the larger financial system they can provide innovation, reduct ion of mispricing, gains in both growth and employment, and the provision of capital for technological and economic development.