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Emerging markets hedge funds: big promises, but what about the risks?
Emerging markets hedge funds promise you big returns, but what are the risks involved in these funds? Hedge funds are pools of investment money that is pooled by a number of investors. This funds are not registered and are private, and so is the investment pool. When hedge funds were first introduced, only wealthy investors used them. That has changed in the last decade, and many well known money managers for big investment banks have branched out and started their own hedge fund. The funds of hedge funds can be invested in almost anything, and emerging markets hedge funds place the funds in the investment pool into the emerging markets.
Emerging markets can include a significant amount of risk, depending on which emerging markets the funds are invested in. Emerging markets are countries that are developing, and are becoming industrialized. The risks involved come from many different factors. Emerging markets are not as stable, and are more volatile, than many other markets. The political climate of the country can play an important role in the market movement and volatility. Many emerging markets are not democracies, and may be run by political parties and regimes that are not conducive to a free market. In emerging countries and markets, a coup or other political upheaval can change the market conditions and cause severe financial losses. Emerging markets can also have a higher inflation rate, and a stronger currency against the American dollar. A lot of emerging markets do not allow short selling, which means that it is not always possible to effectively hedge against financial losses.
The hedge fund structure also adds more risks, to emerging market hedge funds and all other hedge fund types. Hedge funds are not highly regulated by the SEC, because they are private investment pools managed by an experienced investor and money manager. This has led to hedge fund fraud totaling more than a billion dollars in recent years, which also increases the risks associated with all hedge funds, including emerging markets hedge funds. Emerging markets are a much higher risk, that is why the possible return is so high. When hedge fund managers promise high returns, this is if the risks do not happen and the investing strategy works just as intended. Unfortunately this does not always happen, especially in the emerging markets. Market conditions in emerging markets can change very rapidly, and this means a larger chance of a financial loss from these investment types.
Capital invested in emerging markets mutual funds should never be capital that you can not afford to lose. Because of the extremely high risks that these markets represent, no investment is considered safe in these funds. Yes the returns may be much higher when successful, but these investments have a high level of capital loss and market instability. Because emerging markets are not fully developed or industrialized, they are considered high risks by most advisors and financial experts. Conservative investors who want minimum risks and capital preservation should not invest in these markets or hedge funds, because the chance of losing it all is substantially higher with these investments. Instead, look at the many other investment options which carry less risk, even though they offer a lower return. For most investors, a low return and investment stability is more important than a higher return and a larger chance of capital loss.
The information supplied in this article is not to be considered as medical advice and is for educational purposes only.