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Financial crisis cause and effect on fixed income hedge funds

Fixed income hedge funds have been loosing clients at a rapid rate, thanks to the current financial crisis and the stagnant economy. But what are fixed income hedge funds, and why are clients leaving these investments because of a poor economy and a financial crisis that is getting worse? A hedge fund is managed by a risk manager who has branched out on their own, normally after leaving an investment bank or other financial institution, to manage funds. These hedge funds offer many benefits that traditional funds do not, but they also bring risks as well. A fixed income hedge fund is a hedge fund that invests into fixed income securities, also called fixed interest securities. These securities are issued by companies and entities that to borrow funds for longer time periods. Fixed income securities can be issued by a government, corporation, or even a bank. When a fixed income security is issued, the issuer has an obligation to make interest payments to the securities holder at specific intervals. After the security has matured, the full principal amount of the investment will be given back. By investing in fixed income hedge funds, you will receive steady interest payments, plus get your initial investment capital back at the end of the time period. A fixed income hedge fund strategy usually focuses on the returns received by investors in the form of interest payments.

With a fixed income hedge fund, you agree to loan money in exchange for a specific interest amount, that is paid periodically. This seems like a pretty safe investment, so why are clients leaving these funds? Anytime securities which are debt related are owned, there is a risk of financial loss involved. The financial crisis has caused the stock market to become extremely volatile, with ups and downs worse than a yo-yo. Many businesses have gone under, including some big name companies that have been in business for centuries and were considered extremely solid and stable. In addition, the government had to step in with a bailout to prevent a complete financial meltdown from occurring, and now the biggest three American automakers are appealing for financial help. The confidence of investors and consumers has been completely eroded, and this has lead to a majority of investors pulling their capital out of all financial markets, including fixed income hedge funds. The default rate for businesses has more than doubled just in the last twelve months alone, and this is bad news for any investor who has fixed income securities investments in the companies who default. This is where the risk part comes in, because if a company goes under, you could end up losing all your investment capital.

Loss aversion is the biggest reason that investors are pulling out of asset management funds and fixed income hedge funds. Because these funds do have some risks involved and the financial market as a whole is in chaos, many investors are pulling their investments out, and investing instead in very low risk options. Until the markets stabilize and the financial crisis is under control, most investors are going to stay away from fixed income hedge funds. The funds of hedge funds are invested in ways that carry some risks, and most investors right now are staying away from any risky ventures because of the economy and financial climate. A few investors may leave their investment capital in these funds, but as the financial crisis gets worse more and more investors will continue to pull out of these funds in favor of safer investment options with fewer risks.

The information supplied in this article is not to be considered as medical advice and is for educational purposes only.

One Response to “Financial crisis cause and effect on fixed income hedge funds”

  1. 1
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