Hedge Fund Modelling and Analysis using MATLAB

CHAPTER 1 The Hedge Fund Industry

The global credit crisis originated from a growing bubble in the US real estate market which eventually burst in 2008. This led to an overwhelming default of mortgages linked to subprime debt to which financial institutions reacted by tightening credit facilities, selling off bad debts at huge losses and pursuing fast foreclosures on delinquent mortgages. A liquidity crisis followed in the credit markets and banks became increasingly reluctant to lend to one another causing risk premiums on debt to soar and credit to become ever scarcer and more costly. The global financial markets went into meltdown as a continuing spiral of worsening liquidity ensued. When the credit markets froze, hedge fund managers were unable to get their hands on enough capital to meet investor redemption requirements. Not until the early part of 2009 did the industry start to experience a marked resurgence in activity realising strong capital inflows and growing investor confidence. Nevertheless, this positive growth has since been slowed as a result of the on-going European sovereign debt crisis affecting the global economy.

The aftermath of the financial crisis has clearly highlighted many of the shortcomings of the hedge fund industry and heightened the debate over the need for increased regulation and monitoring. Nevertheless, it has since been widely accepted that hedge funds played only a small part in the global financial collapse and suffered at the hands of ...