Seminar paper from the year 2007 in the subject Business economics
- Banking, Stock Exchanges, Insurance, Accounting, grade: 1,1,
Berlin School of Economics, course: National and International
Financial Relations, 13 entries in the bibliography, language:
English, abstract: With the recent announcement of the investment
bank Bear Stearns that two of their hedge funds High-Grade
Structured Credit Enhanced Leverage Fund and High-Grade Structured
Credit Fund had become nearly worthless, the discussion about hedge
funds was newly rekindled. The funds were mainly invested in the
market for mortgages loans to debtors with a medium or low degree
of credit worthiness, the so called sub prime lending. They traded
with collateralized debt obligations (CDO), which bunch the risk of
those loans. Due to the decline in prices of properties and the
increase in interest rate debtors got into trouble. Therefore the
CDOs lost worth and the funds became bankrupt. Even if that is very
problematic for the investors and the investment bank some
economists think, that there could occur bigger problems. Meanwhile
there are rumours that other funds got into trouble and economists
worry that they could destabilize the whole financial system, due
to their close relations to other financial institutions. Banks, in
particular, which financed the funds, are in danger of being
affected. Whether this small crisis will spread or not can actually
not be answered. In the next days and months that remains to be
seen. But for sure the discussion about hedge funds will be
renewed. Therefore this essay will deal with that complicated
topic. It is tried to explain what hedge funds are and how they
work. For this purpose, first of all a proper definition for hedge
funds is given. Secondly, the origin of hedge funds will be
described and then the typical characteristics will be elaborated.
Next, there is a short overview of the common strategies and about
the development of hedge funds given. In the last
General
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