What is the role of hedge funds in the financial market

There has been rapid proceeds in the number of keenness silver and their assets under management, suggesting they provide economic value to investors that is not on hand(predicate) in former(a) enthronisation instruments. Their main aim is to reduce put on the line and volatility whilst attempting to preserve capital and deliver positive returns under e rattling market conditions. They used a range of aggressive methods to invest in a wide array of assets to generate returns which hit a very low correlation with traditional asset classes, creating a diversifying effect on a portfolio.This means they get a constant level of return, irrespective of what the market does. Hedge money tend to be illiquid as investors argon limited in terms of when and how much money they are open to take out, therefore they are long term propositions. Originally, hedge funds were not subject to the public disclosure or regulatory inform requirements that apply to other monetary institutions, t hus they had little or no regulatory oversight. But since the financial crisis, more orders have been introduced, such as reporting under AIFMD The Alternative Investment Funds Managers Directive.Also, from February 2014, they will have to report under Emir. Policy director in the BBAs Capital trade and Infrastructure division, Andrew Rogan, recently said If funds dont comply with Emir, there are legitimate consequences to how a business potentiometer use derivatives to protect itself from risk and you may 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 entropy and strategies to manage, or hedge against, risk. Private investment companies provide valuable liquidness to financial mark ets in normal market conditions. In Hands mangle Hedge Funds, Sebastian Mallaby states that by buying irrationally cheap assets and marketing irrationally expensive ones, they shift market prices until the irrationalities disappear, thus ultimately facilitating the effective allocation of the worlds capital. (Mallaby, 2007). Consequently, hedge funds can be less volatilizable than individual pullulates 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 flexibility, they are able to trade different securities in several markets at once, so opportunities for returns are maximised, improving risk management and encouraging design ot strategies, as well as financial products and services.There is also a militant advantage as hedge funds attract hu man nd financial capital, contributing to a stronger economy. They can act as an inducement 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 set economic growth and stability. Hedge funds also improve the capability 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 playing an essential part of the price breakthrough mechanism. Some researchers believe short interest is an indicator of poor stock performance, and that short sellers exploit market mistakes. Hedge funds have galore(postnominal) different benefits such as diversification, flexibility and liquidity, but to the larger financial system they c an provide innovation, reduction of mispricing, gains in both growth and employment, and the provision of capital for technological and economic development.