As Hedge Funds Go Mainstream, Risk Is Magnified
Hedge funds used to reek of exclusivity. They were run by the most cunning traders on Wall Street, who employed exotic trading techniques designed to make money regardless of whether markets rose, fell or stayed flat. Their clients included only the super- rich.</br></br>Hedge funds are now a $1 trillion industry. Millions of middle- class people invest in them through pension funds or mutual funds.</br></br>The Virginia Retirement System, for example, recently increased its investments in hedge funds to $1.6 billion, or close to 4 percent of its assets. The Baltimore City Fire & Police Employees' Retirement System put $80 million into hedge funds last year, while the City of Baltimore Employees' Retirement System invested about $55 million, or 5 percent of its assets.</br></br>Some experts say pension funds and university endowments are plowing money into the high-fee funds at the worst possible time. Investment returns have dropped, inexperienced managers are piling in and some sophisticated investors appear to be pulling money out. Hedge funds make -- and risk -- big money by making big bets, mostly with borrowed money. They bet on movements in multiple markets, whether it be in stocks, bonds, currencies, commodities, options, derivatives or any combination of the above.</br></br>Estimates suggest that hedge fund trading can account for as much as half the daily volume on the New York Stock Exchange, though as with so much else in the lightly regulated hedge fund world, reliable figures are difficult to find.