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Regulatory overview - questions and answers.
 
8.

Why the bad reputation?
 

Many criticisms have been levied at hedge funds. These include:
 
Some say that the hedge fund industry is a bubble waiting to burst. The demise of Long Term Capital Management in 1998 shows just how dramatic this can be
The high failure rate - some strategies, such as managed futures, had an attrition rate as high as 14.4% per year between 1994 and 2003, according to a study recently released by the European Central Bank
The use of shorting strategies can arguably have a distorting effect on the market, particularly given lack of transparency as regards the size of open short positions
Lack of prescription in  respect of how the funds are priced and valued
 

Nevertheless, international Regulators, including the UKs FSA have acknowledged the important part that hedge funds play in the financial markets including in respect of adding liquidity to the market through their shorting activities. Also, there have been moves to set base-line standards over things like pricing and valuation. See for example the September 2004 Guide to Sound Practices for Hedge Fund Administrators agreed between the Alternative Investment Management Association (AIMA) and the Dublin Funds Industry Association (DFIA). 

Moreover, the fact is that most sophisticated investors, including risk-adverse investors such as pension funds, have hedge fund investments in their portfolio. See also the section

To read about some of the better known failures that have occurred in the hedge fund sector, including Long Term Capital Management, click here.
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