It is necessary and pertinent to discuss the importance of any study, and this particular study is important to many people across many countries. Not only does it have importance for people who are trusting people with their pension and hedge funds in Germany, but it also has importance for people who are considering a career working with these funds and those who are currently serving in the capacity of brokers and advisors. The reason behind this is that hedge funds are not going to disappear, and people have to understand how they work and what they are for so that they do not harm their own investments or others' investments moving forward. It is possible that, in the future, new and better ideas for pension funds and hedge funds will come about.
Also important is being able to identify the people who are most at risk for losing money (i.e. losing their pension funds) when they involve themselves with hedge funds. Not all fund opportunities work in the same way, and people with pension funds should certainly understand that hedge funds may not work in the same way that they expect them to, and that those who are brokers for hedge fund opportunities may not spell out all of the specifics.
With that in mind, two people may go through the same basic hedge fund manager, but one may be perfectly fine afterward and one may have many problems associated with the experience. The difference between the two could be caused by many things, including the person's view of the hedge fund opportunity, what the market has done, and whether the fund manager was actually clear in explaining how hedge funds and pension funds work, as well as countless other issues.
This study is important to the future of this kind of research because it will give a great deal of insight into the topic and discuss many of the concerns that exist now and the different options that are being used to address those concerns, as well as what is being considered for the future of the field where both pension funds and hedge funds are concerned. It will also show similarities and differences between hedge funds and pension funds so that there is a clearer understanding of the issues surrounding the study. One of the main reasons why this comparison is so important is that individuals can sometimes easily misunderstand the differences between the two, and if they are not clearly explained by a knowledgeable person, the investors financial future can be put at risk.
Naturally, it can be seen how this would be a concern, and therefore hedge funds must be carefully studied and separated from pension funds, which may seem similar in many cases to those who are not trained in these matters. The literature review will look more closely at the comparison thereof, among many other things.
The unregulated nature of hedge funds allows for management freedom with regard to the investment strategies, asset classes, leverage, shorting, and derivative use. On the other hand the low transparency, lack of standards measuring risk and return, and serious data problems involved in the hedge fund databases masks the risks involved in investing in hedge funds (Schachter, 2004). Based on that information this paper will look at the following hypothesis to determine whether it is valid or invalid:
Since risks with hedge funds are unclear hedge funds cannot be used to lower the overall risk in a pension fund portfolio, therefore, they are not suitable investment vehicle for pension funds.
The objectives of this thesis include defining 'hedge fund' and 'pension fund' and showing what is hiding behind those generic terms. Here the structural configurations of both hedge funds and pension funds will be explained along with their different restrictions. The researcher will continue by demonstrating why pension funds seek to invest in hedge funds and what benefits can be gained from doing so in terms of risk and return. In addition, the researchr will mention the variety of risks involved in investing in hedge funds, and illustrate the variety of database biases that plague the hedge fund industry. Once the basis of understanding has been established, different methods to calculate risk will be illustrated.
In the empirical section, a case study will be conducted to show how hedge funds can be used to optimize the pension funds risk and return profile. To begin, one risk parameter and a series of different hedge funds following different investment strategies will be selected. The thesis will continue by analyzing the results of the case study with respect to risk and return.
The researcher will conclude the thesis by exploring whether hedge funds can be used to lower the overall risk of pension funds. Should the research show that hedge funds do lower the overall risk, the extent to which the hedge fund has lowered the overall risk of the pension fund will be addressed. Though hedge funds appear to have the tools for following absolute return strategies, they may not be as low-risk as their name suggests. Therefore the researcher will conclude with whether it is believed that hedge funds are suitable investment vehicles for pension funds based on the evidence presented in this study, thereby effectively addressing the hypothesis.
Rationale for the Study
An important part of the rationale behind this study is that there have not been any other studies done specifically like this one. Doing a study like this therefore provides new and unique information, but it can also be difficult, since there is really no precedent for this type of study that the researcher can follow. The potential problems that a study like this could have will be dealt with further in the methodology section, since they are important concerns that must be pointed out and discussed.
Methodology and Overview
This thesis will provide an overview of hedge funds and pensions funds. The historical development of hedge funds will be presented followed by its definition. Pension funds will be introduced using a similar structure. Reasons for pension fund interest in hedge funds will be given, and the different risks that may be encountered by investing in hedge funds will also be explained. The thesis is based on secondary research of existing literature regarding hedge funds, pension funds, the stock market, and international financial market regulations, as well as official online newspapers and official online information portals published in Europe and the United States.
The portfolio theories and different methods of calculating risk and return will then be introduced. As each risk calculation method targets specific risk criteria, the methods will be differentiated. This discussion will be based on secondary research of existing literature regarding hedge funds, pension funds, the stock market, and international financial market regulations, as well as official online newspapers and official online information portals published in Europe and the United States.
Using the introduced portfolio theory and risk calculation methods, the researcher will describe how hedge funds can be added into pension funds to reduce their overall risk level for an expected return. Some examples using the different methods will be given. This overview will be based on secondary research of existing literature regarding hedge funds, pensions funds, and the stock market published in Europe and the United States.
In the empirical section, the researcher will present the types of pension funds and hedge funds that will be used. Their characteristics and overall strategy will be presented and a brief explanation will be given as to why the data is anonymous. The information for that section will be based on primary sources from BNP clients and Bloomberg. The research will be complemented by secondary research of existing literature regarding hedge funds, pensions funds, official online newspapers, and official online information portals published in Europe and the United States.
The empirical section will continue with a methodology explanation. The different calculations will be presented through the use of graphs and tables. The results will be complemented by secondary research of existing literature regarding hedge funds, pensions funds, official online newspapers, and official online information portals published in Europe and the United States.
The research limitations of this paper will also be stated and the paper will conclude with the presentation of the researcher's findings showing if hedge funds can be used to reduce the risk of pension fund portfolios. Furthermore, the paper will address whether, in the opinion of the researcher, pension funds should invest in hedge funds before concluding with suggestions for future research.
CHAPTER TWO: REVIEW OF LITERATURE
Reviewing the literature is one of the best ways to learn about a subject and to determine where there are gaps that should be addressed. With that being the case, pension plans will be discussed first so that the reader can have a better understanding of what pension funds are used for and how important…