The student’s master thesis aims to investigate the relation between hedge fund flows and economic policy uncertainty. Starks and Sun (2016) are the first ones to empirically analyse the effect of economic policy uncertainty/macroeconomic environment on mutual fund flows. Despite certain similarities between mutual funds and hedge funds, the question is to what extent differences in the fee and compensation structure of hedge funds influence this relationship.
High returns, reduced volatility, and low levels of correlation with the stock market have driven institutions and wealthy investors to increasingly invest in hedge funds. Over the last 20 years, hedge funds have grown by 2,754.0% in Assets under Management (AuM) to approx. $3.3 trillion worldwide in the 3rd quarter of 2017 (BarclayHedge, 2018). MR1 Yet, investments in hedge funds relative to assets under management worldwide are very little: in 2016, hedge funds made up 3.5% of worldwide AuM (BarclayHedge, 2018; PwC, 2017). Similar to mutual funds, hedge funds are actively managed and pooled investment vehicles. A hedge is traditionally known as the aim of limiting a position’s risk exposure in case of adverse market movements (Dixon, Clancy, and Kumar, 2012). To counteract such adverse price fluctuations, investors often enter offsetting positions in analogous securities (e.g., derivatives). However, hedge funds do not necessarily hedge. In fact, some funds do not have the objective to limit its risk exposure. The intention of exploiting an unobserved mispricing in the market might prompt hedge fund managers to take a highly speculative and leveraged position. Despite this, hedge funds are generally perceived as having a low correlation with the stock market (References). Given a low correlation to bond and stock markets, allocating part of one’s investments to a hedge fund enhances the entire portfolio’s diversification.
Hedge funds are set up to circumvent regulations. Section 3(c)(1) and 3(c)(7) of the U.S. Investment Company Act of 1940 exempt private funds from registration and disclosure provisions of the SEC if the fund is either (i) privately placed and not owned by more than 100 investors (Sec. 3(c)(1)) or (ii) owned by qualified investors only.1 On the one hand, the eligibility of circumventing certain SEC requirements implies that hedge funds are restricted from public advertising and to be only offered to wealthy investors and large institutions. On the other hand, the exemptions of regulatory provisions award hedge funds flexibility in the size of their positions, the use of leverage to finance positions, and the type of assets they can invest in. Disclosure exemptions further immune hedge funds from having to disclose holdings and trading strategies to competitors. Often, hedge funds require initial minimum investment requirements
1 Section 2(A)(51) of the Investment Company Act of 1940 defines a qualified purchaser as individual whose investments amount ? $ 5 million or institutions whose investments amount to ? $25 million.
MR1Appendix: Add absolute growth figure and relative growth in comparison to mutual funds, ETFs, etc.