[FOUNTAIN]Markets fall, and blame is misplacedSome say there are only two kinds of stocks: those whose prices go up and those whose prices go down. There is no such thing as a good stock or a bad stock. The point is to determine when the price will go up and by how much. Warren Buffett, the celebrated investor whose nickname is the “sage of Omaha,” makes long-term investment decisions and buys solid but undervalued stocks and waits for their heyday. In contrast, hedge fund investors bet on the short-term rise and fall of prices.
Alfred Winslow Jones was the first to coin the concept of a hedge fund in 1940. He originally named it “hedged fund” but Wall Street investors called it a “hedge fund.” As the name suggests, the hedge fund is an investment technique whose purpose is to avoid losses by planning the investments to take account of both possibilities. If a stock price were expected to fall, the hedge fund would use techniques such as call options, and buy the rights to buy the stock at a later date. The hedge funds not only deal with stocks, but also foreign exchange, interest rates, raw materials and any market with floating prices.
In the late 1990s, hedge funds were branded as plunderers that looted financial markets. George Soros, the most successful hedge fund manager and investor, was criticized as having caused the East Asian financial crisis. During Russia’s financial crisis, Long-Term Capital Management, a major hedge fund managed by the winners of Nobel Prizes for economics, was on the brink of bankruptcy and had to be bailed out by major American banks.
But Daniel A. Strachman, the author of “Getting Started in Hedge Funds,” points out that a hedge fund is actually very different than the image in the minds of non-experts. He claims that hedge funds are not responsible for fluctuations of financial markets ― the problems, he says, are in the markets. And, he says, because hedge fund managers invest in the funds themselves, they are safer than other mutual funds. Indeed, hedge funds grew by more than $400 billion, to $1.16 trillion, in the last year.
Recently, hedge funds are being blamed for falling stock markets, including that in Korea. Mr. Strachman’s claim, that the markets are responsible for the fluctuations and that hedge funds are simply targeting those weaknesses, sounds more plausible an explanation for what is going on.
by Lee Se-jung
The writer is an editorial writer of the JoongAng Ilbo.