The consequences of government imposing a price above or below the free market equilibrium Essay Example for Free

The consequences of government imposing a price above or below the free market equilibrium Essay 1. Use a diagram to show the consequences of government imposing a price above or below the free market equilibrium. (10) When government imposes the free market and prohibits a price from going above a certain level, we call it price ceiling. If the price ceiling is below the equilibrium price, then shortages are created. The intention of price ceiling is to protect consumers from rapid price increases. However, this intention comes with consequences that are unintended. An example of price ceiling is the gasoline shortages in the 1970s. The diagram below will show the consequences of price ceiling: In the first stage (before government imposing), the equilibrium price of oil per gallons is $1.20. This is where the number of demand equals to the quantity of product sold. The graph of demand and supply when government imposes the price below the free market equilibrium is shown below: We can see form the graph that the supply contracts from point A, the equilibrium, to point B, which represents the quantity of gallons if the price of oil was to be changed to $1. When supply contracts, it means that the quantity of oil that is supplied becomes less. Because of the shortage of oil, the demand will extend. The lack of supply of oil and the excess demand, scarcity will occur. Even though scarcity of oil existed before, shortages did not happen before the government imposed. Another outcome of price ceiling is the illegal economic activities that may occur. Because the maximum price that the government pointed is less than the equilibrium price, producers would feel that they could earn more money. With the shortage and the excess demand of oil, producers would then sell the products at a higher price illegally, and they would succeed in doing so because consumers would still need the oil that is so scarce in the market. Because illegal economic activities would occur, the government would then need to hire inspectors. These inspectors would have to supervise the oil market. Hiring inspectors would cost the government more money; therefore the government spending will increase. However, the producers of oil that are investigated would still find a way around the rules and regulations from the inspectors. For example, the producers would lie about their income as they have sold their product in the black market to make more money. This would lead to tax evasion as well, because they would understate their own income. 2. Evaluate the impact of either rent controls or a minimum wage. (15) Rent control is an example of price ceiling. This is a law that prohibits landlords to raise the price of rent to go above the price that they have determined. This law is determined by state or country legislatures. In Mumbai, the rent control act started in 1947, with the intentions of making houses affordable to more people. In rent control, the government imposes the price below the free market equilibrium, making the price lower than what it is supposed to be. Although the government intended well, the act proved that instead of benefitting the whole country, it mostly only benefit some of the poor and the people who already rented a place before the rent control. In the short run, rent control helped many people in obtaining places to live. This mostly helped the poor people who could not afford rents before. However, the effects of rent control have not fully happened in the short run. The number of people who look for housing may not be as high as it takes time to arrange housing. As market conditions change, it also takes a long time until the landlords could adjust the number of apartments they rent. As a result, rent control in the short run had quite a positive impact. However, as time passes, the disadvantages of rent control outweighed the advantages. Even though the intentions of rent control were to protect the rights of the poor, rent control did the exact opposite. As rent control continues in Mumbai, the landlords started to discontinue their rent because they are getting less money for their rents than the years before. Because the price of rents was below equilibrium price, landlords felt that they could earn much more with their rents. With the decreasing supply of rents in Mumbai, the number of demand increases. However, these demands could not be fulfilled with contracting supplies. As supply contracts and demand extends, the rent control act creates a shortage of rents. This would lead to homelessness, as people cannot find homes to live in. Although the rent control act denied access to the migrants, it protected the people that are already housed in Mumbai. Because of their safety in the rent, the people that are housed would refuse to leave, and it would cause immobility, meaning that companies outside would not be able to hire someone from Mumbai, even though they are very capable for the job. There are also cases in which people give their houses to their children, their children give it to their children, and so on. This again, decreases the supply of rents. As time passes and the landlord wants to renew the houses, those people who have stayed in the houses would be paid to leave, thus becoming millionaires when they only had to pay $20 each month. The lack of supply of rents is also seen as the biggest reason for slums in Mumbai. As the number of rents occupied increase and the number of the rents available decrease, more people would not have a place to live, resulting to the slums in Mumbai. Not only does rent control affect the tenants, it also effects what the landlords do. Because the price of rents fall, the landlords would not earn as much money as they did before, when it has potential to earn much more money. As a result, the landlords would decrease the quality of the houses. They could also charge the tenants for things that are supposed to be included in the rent expense, such as TV. In conclusion, rent control acts, particularly in Mumbai had more disadvantages than advantages. Even though it protects the rights of the poor by decreasing the price below the equilibrium, rent control only lead to a shortage of rent. The shortages would then cause slums to increase, as the demand extends but could not be fulfilled. ________________ References: Houterman, Robin. The Global Urbanist. Indias New Model Residential Tenancy Act: A one-size Solution That Hardly fits All N.p., 05 June 2012. Web. 16 Sept. 2012. http://globalurbanist.com/2012/06/05/india-model-residential-tenancy-act. Lessons From Elsewhere: Mumbai Rent Control. Cairobserver.com. N.p., 09 July 2012. Web. 16 Sept. 2012. http://cairobserver.com/post/26830679617/lessons-from-elsewhere-mumbai-rent-control. Lewis, Clara. Proposed Rental Law Gets Brickbats. The Times Of India. N.p., 1 June 2011. Web. 16 Sept. 2012. http://articles.timesofindia.indiatimes.com/2011-06-01/mumbai/29608341_1_landlords-maharashtra-rent-control-act-tenant-associations. Mahajan, Sulakshana. The Rent Control Act. Http://sdmahajan.tripod.com/. N.p., n.d. Web. 16 Sept. 2012. http://sdmahajan.tripod.com/slumming_mumbai.pdf. Principles of Economics. Google Books. N.p., n.d. Web. 16 Sept. 2012. http://books.google.com.sg/books?id=nZE_wPg4Wi0C. Thakur, Pooja. Mumbais Boom Turns Renters Into Millionaires.Www.businessweek.com. N.p., 05 July 2012. Web. 16 Sept. 2012. http://www.businessweek.com/articles/2012-07-05/mumbais-boom-turns-renters-into-millionaires. Tree of Knowledge. The Madness of Mumbai. N.p., n.d. Web. 16 Sept. 2012. http://tokblog.org/?p=309.

last words of Christ Essay -- essays research papers

JESUS LAST WORDS ON THE CROSS The seven last words of Jesus on the cross demonstrate both his humanity and his divinity, and capture the last moment Jesus went through to gain our forgiveness. 1. Father forgive them, for they know not what they do: (Luke 23:34) Forgiveness for those who arrested condemned and executed Jesus†¦but also forgiveness those who drove the nails into the hands of Jesus, and those who mocked him. It is amazing to see the boundless mercy of Jesus. The first words He utters when he goes onto the Cross are words of forgiveness. This echoes what Jesus feels today when he looks down upon us and says the same words of forgiveness   Ã‚  Ã‚  Ã‚  Ã‚   Parallel verse: Matt 5:44 Love your enemies, bless those who curse you, do good to those who hate you and pray for those who spitefully use you and persecute you-- Jesus is putting in practice his own teachings! 2. Today, you will be with Me in Paradise: (Luke 23:43) There were two thieves crucified on either side of Jesus, both gasping for life, and in horrible pain. The thief on the right had been watching Jesus; he knew this man was innocent. He just heard Jesus asking God to forgive the people—the thief hears about forgiveness straight from Jesus. So the thief says this man is innocent. He defends Jesus, while no one else does! He knows he’s close to death†¦so he asks Jesus remember me when you come to your kingdom†¦he turns to Jesus for forgiveness, and Christ accepted him—today you will be wi...

An analysis of the Heart of Darkness and Alice’s Adventures in Wonderland Essay

The â€Å"Heart of Darkness† by Joseph Conrad and â€Å"Alice’s Adventures in Wonderland† by Lewis Carroll tell a journey into a world which is a conflicting reflection of the protagonist’s â€Å"real† world. As the protagonists travel to new places, they are both presented with clashing views on prevailing themes in their lives. In the case of Marlow in the Heart of Darkness, he is faced with opposing ideas on the most vital components in imperialism – trade and slavery. As for Alice in Wonderland, the young girl is confronted with the challenge to accept the conflicting basis of maturity following both rational and irrational complexities in the society. In both of the novels, the relationship between the two worlds were portrayed as the struggles which people had to face in order to formulate their own personal ideologies based on their varying views presented by the society. Moreover, alienation (or the fact that each of the protagonists had to handle their struggles alone) was promoted as a necessary step towards the full appreciation of one’s social construction of reality. Clashing views on imperialism: Moral Responsibility vs. Pure Suppression In the Heart of Darkness, contrasting views of imperialism and slavery are challenged. Marlow, the protagonist of the story, comes from a world where the enslavement of the Africans is considered as essential and customary pieces of the colonial enterprise. The men who were working for the Company – upon which Marlow is also a part of – treats the blacks in an perverse, cruel, and often viciously violent manner. However, this harsh treatment is seemingly justifiable as Marlow’s world regards the slaves as uncivilized. Thus, the process of slavery is not seen as it is. Rather, it is often deemed as a vital part of the benevolent project of â€Å"civilizing† the natives. As such, prior to his journey upriver to see the fabled Kurtz, Marlow maintains his role of masking the slavery and violence by the socially accepted idea that the subjugation is based on legitimate backgrounds of moral responsibility. As Marlow meets Kurtz however, Marlow’s idea of the glamour of conquest and imperialism evolves into a struggle of morals. As he survives the river, meets the natives, and finally encounters the man that is reputed to be honorable and upright, his moral beliefs shatter. Technically, he is not faced with a world that’s entirely different from where he came from. Instead, what Marlow encounters is a setting where there is a whole new definition of conquest and trade – the main activities upon which he was engaged in. Basically, Kurtz was not the man Marlow and other people envisioned him to be. In conflict with the prevailing social definition of conquest for the Company, Kurtz saw the truth in imperialism. The presumed praiseworthy man was in fact a tyrant among the natives. He realized the fact that he was not trading but rather forcing the natives to find ivory for him. Moreover, Kurtz was open to the idea that he was – in no positive way – civilizing the natives. Rather, he was suppressing them, controlling them through intimidation and extreme brutality, and using them to his advantage, and the Company’s benefit. As a result, Marlow’s encounter with Kurtz only served as a perplexing experience where he had to question what the real purpose was behind acts of conquest and slavery: Are his actions just a tool for injustice and intimidation? Is there really no justifiable cause for intimidating the natives? To a certain degree, Marlow’s experience with the â€Å"other† world puts him in a crisis of whether he should continue believing that his world’s obviously unjust practices had a good and tolerable cause or not. Growing up: Tolerating the illogical and irrational In the story Alice’s Adventures in Wonderland, conflicting views of maturity and growing up is presented. On one hand, the real world equates maturity as the state where logic and rationality is used in reasoning, interpreting, and in maintaining harmony in the society. In contrast however, the young Alice equates adulthood as to what she sees in Wonderland – a place where silly and illogical regulations are created on the basis of egoistic goals and ambitions, propelled by bad habits and wrong ideals that people willingly developed throughout the course of history. In Wonderland, Alice faces a new world – one wherein the ways of reasoning are every much in contrast of hers. To a certain sense, her new world is similar to the â€Å"real† world of adults because both are comprised of rules which are, most of the time, very confusing. A typical example is the character of the Duchess who always tries to find a moral in almost every thing that is happening around her. In the real world, adults are akin to the Duchess as they always try to live by the social norms which they created from their own interpretation of their society. Another complex idea is the tolerance of the senseless orders of beheading given by the Queen of Hearts. Such scenario can be equated to the devastating wars often prompted by political leaders who are supposed to propagate world peace and progress. Also in Wonderland, trials seem to be very irrational and unjust; in the same way, justice is as confusing in the real world where fairness and integrity are supposedly practiced and promoted. As Alice struggles to understand the complexity of what is happening in Wonderland, she challenges her own idea of what is rational and supposedly mature. Confronted with what’s hypothetically mature, Alice gradually evolves into a mature person who is able to formulate reasonable and valid interpretations of history and her present experiences. While Alice is confronted with odd events and curious beings in Wonderland, she tries to formulate reasons based on her social interactions with the creature and adjusts to the demands of the magical world. Through the interpretations that Alice forms from wonderland, she fulfills what is expected from a mature individual – the ability to tolerate the complexities of life. As she forms a basis of reasoning and logic, she then forms her own subjective norms which are, to a certain extent, still confined within the prevalent ideas in Wonderland. These norms allow her to define her identity and at the same time, give her the chance to adjust and adapt to the situations that she faces in a place where â€Å"everyone is mad†. Through her adventures, Alice ultimately grows up and matures. CONCLUSIONS Two worlds as struggles towards the formulation personal ideals In both of the novels, two opposing worlds were used as bases that will allow the main character to formulate his/her own personal ideologies and interpretations of prevailing themes in their lives. In the case of Marlow, the clash between the two worlds – or rather their definitions – gave him a chance to weigh his morals not merely on the more popular and conforming idea that African enslavement was natural and acceptable. Through his confrontation with Kurtz, he became enlightened. The experience somehow liberated him from his blind adherence to the society and showed him the real circumstances of his actions and that of his society. As for Alice, the conflict between the real world and Wonderland also gave her the chance to construct an understanding of maturity. From a child’s point of view of adulthood as something incoherent, illogical, egoistic, and irrational, Alice was able to realize that such complexities were part of real life and that tolerance to what is seemingly unreasonable must be achieved in order to be capable of surviving and adjusting to the different scenarios of living. As such, it can be noted that the incompatible relationships between the two worlds in each of the novels were presented as personal struggles towards the achievement of personal ideals formulated from varying views and interpretations that were present in the society. Alienation, an essential process for the social construction of reality It can be noted that both protagonists in the stories had to face alienation in the new worlds that they had to take part of. The fact that each of the protagonists had to handle their struggles â€Å"alone† promoted the theme of personal conflict in the novels. Furthermore, this alienation heightened the level of conflict which existed in the clashing relationship between the two worlds that the characters had to take part of. In the case of Alice, she had to face different situations with different characters and different modes of reasoning all on her. Through this loneliness, she was able to fully grasp the idea that maturity is complex and that life itself was full of complexities and â€Å"madness†. This realization led her to construct her own set of interpretations, definitions, and realities which paved her way towards maturity. Marlow, on the other hand, became alienated as he became exposed to a world where slavery among Africans was regarded as what it really is – a mere act of cruelty for the benefit of the White people. He was alienated in the sense that he formerly had a different – more consoling view of the â€Å"trade† that he was participating in. However, through this alienation, Marlow then achieved a more careful analysis of his society’s actions. By being exposed to the new world all on his own, he was given the chance to liberate himself from the beliefs that he was encompassed within. In general, both of the characters endured alienation as an essential component which emphasized the conflicting relation of the worlds that they were exposed to. This alienation prompted them to think beyond what they were used to and such allowed them to construct their social reality based on conventional and unconventional truths. References: Caroll, Lewis (n. d. ) Alice in Wonderland. Retrieved from Bedtime Story Classics (Accessed 06 Apr 2009 from http://www. the-office. com/bedtime-story/classics-alice-1. htm) Conrad, Joseph (n. d. ) Heart of Darkness. Retrieved from Project Gutenberg Website (Accessed 06 Apr 2009 from http://www. gutenberg. org/etext/526) Maatta, Jerry (1997) An Analysis of Alice’s Adventures in Wonderland. (Accessed 06 Apr 2009 from http://www. alice-in-wonderland. net/explain/alice841. html) __________ (n. d. ) Themes and Motives in Alice in Wonderland. (Accessed 06 Apr 2009 from http://www. alice-in-wonderland. net/school/themes. html) __________ (n. d. ) eNotes on Heart of Darkness – Themes. (Accessed 06 Apr 2009 from http://www. enotes. com/darkness/themes)

Why Investors Invest In Hedge Funds - Free Essay Example

Sample details Pages: 12 Words: 3504 Downloads: 3 Date added: 2017/06/26 Category Finance Essay Type Research paper Did you like this example? Abstract Hedge funds have gained a lot of popularity in the last decade and are one of the fastest growing industries. The main aim of most hedge funds is to reduce volatility and risk. It also attempts to preserve capital and deliver positive returns under all market conditions. Don’t waste time! Our writers will create an original "Why Investors Invest In Hedge Funds" essay for you Create order Not all hedge funds are same therefore it is important to know the difference between them. It differs in terms of its risks,  investment returns and volatility among the different hedge fund strategies. The strategies which are correlated to equity markets deliver consistent returns and have low risk while the ones that are not will be more volatile. Main objective of hedge funds is to provide consistency in its returns for investor, lower portfolio volatility and preserve their capital investments, which is the reason why investors such as pension funds, insurance companies, institutional investors and high net worth individuals and families invest in hedge funds. This thesis reviews various issues relating to the investment in hedge funds, which have become popular with high net-worth individuals and institutional investors, as well as discuss their empirical risk and return profiles. The concerns regarding the empirical measurements are highlighted, and meaningful analy tical methods are proposed to provide greater risk transparency in performance reporting. It also discusses the development of the hedge fund industry in Asia. Asian hedge funds have grown vastly in past few years. It is said to have grown nearly six times as many funds while managing ten times are much in assets since 2000 according to Eurekahedge. The industry is estimated to consist over 1100 funds, and managing roughly $175 billion in assets. International managers are starting up their own Asia-focused funds too. Allocators are increasingly eyeing investment opportunities in Asia. Funds with a global mandate are increasing their allocation to Asia. The paper presents an overview of hedge funds, describing their development and characteristics. It also discussed the various issues related to the measurement of hedge fund performance, as well as examined alternative performance measures. This thesis ends with some remarks on the development of the hedge fund industry in Asi a. 1. Introduction There has several definition of hedge funds throughout the history. There isnà ¢Ã¢â€š ¬Ã¢â€ž ¢t one particular sentence that defines what hedge funds really means. However, according to Chicago Board Options Exchange (No Date), hedge funds can be defined as: à ¢Ã¢â€š ¬Ã…“A conservative strategy used to limit investment loss by effecting a transaction that offsets an existing position.à ¢Ã¢â€š ¬? Alfred Winslow Jones was the first person to create hedge fund structure more than 50 years ago. The fund established had following feature: He created à ¢Ã¢â€š ¬Ã…“hedgesà ¢Ã¢â€š ¬? by investing in securities that was said to be undervalued and funded these positions by taking short positions in overvalued securities hence creating à ¢Ã¢â€š ¬Ã…“market-neutralà ¢Ã¢â€š ¬? position. He designed an incentive fee compensation arrangement for fund mangers. They were paid a percentage of profit from the clients capital assets; and He so invested his own investment capital in the fund, to make sure that his capital and that of his investors were coordinated and in line so that it is not just an individual investment but a partnership Almost all modern hedge funds have above listed features in them, and are set up as limited partnerships with a lucrative incentive-fee structure. In most hedge funds, managers also have a significant portion of their own capital invested in the partnerships. The term à ¢Ã¢â€š ¬Ã…“hedge fundà ¢Ã¢â€š ¬? has been generalized to describe investment strategies that range from the original à ¢Ã¢â€š ¬Ã…“market-neutralà ¢Ã¢â€š ¬? style of Jones to many other strategies and opportunistic situations, including global/macro investing. There is a large variety of hedge fund investing strategies present today and therefore no standard way to classify hedge funds separately. Many data vendors and fund advisors set up their own major hedge fund styles according to their popularity. Under the classification by Credit Suis se, the categories of hedge funds with 9 differentiated styles and a fund-of-funds category: (a) Event driven funds are the funds that take positions on corporate events when companies are undergoing re-structuring or mergers. For example, fund managers would purchase bank debt or high yield corporate bonds of companies undergoing the re-organization which is often referred to as distressed securities. Another event-driven strategy is merger arbitrage where the funds seize the opportunity to invest just after a takeover has been announced. They purchase the shares of the target companies and then short these shares of the acquiring companies. (b) Global funds are categories of funds that invest in non-US stocks and bonds with no specific strategy reference. This fund has the largest number of hedge funds and it includes funds that specialize on the emerging markets. (c) Global/Macro funds are the funds that rely on macroeconomic analysis and invest in long and short positio n in order to capitalise on major risk factors and unforeseen markets such as currencies, interest rates, stock indices and commodities. (d) Market neutral funds refer to hedge fund strategy that involves utilizing strategies such as long-short equity, stock index arbitrage, convertible bond arbitrage and fixed income arbitrage. Long-short equity funds use the strategy of Jones by taking long positions in selective stocks and going short on other stocks to limit their exposure to the stock market. Stock index arbitrage funds trade on the spread between index futures contracts and the underlying basket of equities. (e)Dedicated Short Bias  funds are strategies that take more short positions than long positions and earn returns by maintaining net short exposure in long and short equities. Detailed individual company research typically forms the core alpha generation driver of dedicated short bias managers, and a focus on companies with weak cash flow generation is common. To affect the short sale, the manager borrows the stock from a counter-party and sells it in the market. Short positions are sometimes implemented by selling forward. Risk management consists of offsetting long positions and stop-loss strategies. (f)Convertible bond arbitrage funds typically capitalize on the embedded option in these bonds by purchasing them and shorting the equities. (g)Fixed income arbitrage is a strategy that bets on the convergence of prices of bonds from the same issuer but with different maturities over time. This is the second largest grouping of hedge funds after the Global category. (h) Short/long fund-, shorts focus on engineering short positions in stocks with or without matching long positions. They play on markets that have raised too fast and on mean reversion strategies. Long funds take long equity positions with leverage. Emerging market funds that do not have short-selling opportunities also fall under this category. (i)Emerging Mark ets  funds invest in currencies, debt instruments, equities and other instruments of countries with à ¢Ã¢â€š ¬Ã…“emergingà ¢Ã¢â€š ¬? or developing markets (typically measured by GDP per capita). Such countries are considered to be in a transitional phase between developing and developed status. Examples of emerging markets include China, India, Latin America, much of Southeast Asia, parts of Eastern Europe, and parts of Africa. There are a number of sub-sectors, including arbitrage, credit and event driven, fixed income bias, and equity bias. (j) Fund of funds refer to funds that invests in a pool of hedge funds. They specialize in identifying fund managers with good performance and rely on their good industry relationships to gain entry into hedge funds with good track records. Table 1 gives statistics about the various categories of hedge funds and past performance. The global/macro hedge funds provided the best mean return over the period studied, while the event -driven funds had the lowest standard deviation of returns. On a risk adjusted basis which is obtained by dividing the mean return by the standard deviation, the category of fund that ranks highest is the global/macro funds followed closely by event-driven funds. Hedge funds are not required to publicly disclose performance and holdings information unlike the registered insurance companies, which might be construed as solicitation materials. This is the reason why which makes it more difficult for investors to evaluate hedge fund managers. TABLE 1 Jan 2000 à ¢Ã¢â€š ¬Ã¢â‚¬Å" Nov 2009 Categories Mean Return (%) Standard Deviation (%) Risk-Adjusted Return Event driven 8.66 5.44 1.60 Global 6.60 6.23 1.06 Global / Macro 12.28 6.07 2.02 Market neutral 2.09 13.48 0.16 Short/Long 5.50 8.88 0.62 Emerging Market 9.23 11.05 0.84 Convertible Arbitrage 6.98 8.34 0.84 Dedicated Short Bias (1.95) 16.40 (0.12) Fixed Income Arbitrage 3.66 6.81 0.54 Source: Credit Suisse/ Tremont hedge index Notes: The mean returns are annually compounded returns over the period 2000 to November 2009, The annualized standard deviations were computed from of the standard deviation of monthly returns for each investment style. Risk-adjusted returns are obtained by dividing the mean return by the standard deviation. In 1990 the entire hedge fund industry was estimated at $20 billion. At the end of 2008, global hedge fund industry was estimated to be worth $1 trillion with 8350 active funds. It ha s gained a lot of popularity in the last decade and is one of the fastest growing industries. While hedge funds are well established in US and Europe, they have also been growing rapidly in Asia. Hedge funds have posted attractive returns. A seven year annualised return of 2.47% posted by Hedge Fund Research (HFR) from 2003 to 2009, higher than the SP 1200 of 1.18%. Hedge funds are seen as natural hedge to control downside risk because they employ investment strategies believed to generate returns that are uncorrelated to traditional asset classes. Hedge funds differ in strategies- a macro fund such as quantum fund generally take a directional view by betting in particular bond market or a currency movement. Other funds specialise in corporate events such as mergers or bankruptcies. They also vary widely in investment strategies and the amount of financial leverage. In the recent financial crisis, hedge funds have been heavily criticised in terms of their strategies and also f or the fact that in 2008, they have had hard time fulfilling their absolute return targets. There have been other criticisms towards hedge fund regarding this particular crisis. Stromqvist (2009) writes that ever since the growth of hedge fund industry there has always been discussions regarding the role of hedge funds in a financial crisis. The main focus of the criticism was on highly leveraged hedge funds and that they may have a large impact on price stability on both currencies and equities. In an article written in The Times, Dillow (2008) observes that even though average return of hedge funds in 2008 has been poor, à ¢Ã¢â€š ¬Ã…“they have not been a serious source of instability in the wider financial systemà ¢Ã¢â€š ¬?. Regardless of the recent financial crisis, hedge funds still generate a growing number of interests all around the world. Due to their private nature, it is difficult to obtain information about the operations of individual hedge funds and reliable s ummary statistics about the industry as a whole. It is a common belief that investing in hedge funds can have superior returns. Many success stories have emerged in the past and the most popular of which is the George Soros story. In September of 1992, he risked $10 billion on a single  currency  speculation when he shorted the British pound, which gave him an international fame. He was right, and in a single day he successfully generated a profit of $1 billion à ¢Ã¢â€š ¬Ã¢â‚¬Å" ultimately, it was reported that his profit on the transaction almost reached $2 billion. Therefore, he is famously known as the the man who broke the  Bank of England. The greates investor: George Soros, https://www.investopedia.com/university/greatest/georgesoros.asp 16-12-09 As seen in Table 1, the hedge funds as a group can generate positive returns. For example, over the period 1990-1997, all the hedge funds had positive absolute returns. Global/Macro funds obtained mea n returns of 28.1% p.a. with a standard deviation that is comparable to equity funds. Traditional asset allocation makes the most of the use of equities, bonds, real estate and private equity to invest in a portfolio that maximizes returns and minimizes the portfolio risk. Therefore, in an investment portfolio hedge funds can play a vital role in maximising returns. Moreover, in a bear market, many investment and fund mangers find it dull to just beat the market index, which may have negative returns. They generally prefer to go short or avoid long positions to have positive returns. Choosing an appropriate hedge fund to invest increases the possibility of obtaining positive à ¢Ã¢â€š ¬Ã…“absolute returnsà ¢Ã¢â€š ¬?. It is also generally believed that hedge funds have returns that are generally uncorrelated with the traditional asset classes. In fact, hedge funds may even have a lower risk profile. For example, Morgan Stanley Dean Witter (2000) reported that hedge funds à ¢Ã¢â€š ¬Ã…“exhibit a low correlation with traditional asset classes, suggesting that hedge funds should play an important role in strategic asset allocationà ¢Ã¢â€š ¬?. The answer to the question à ¢Ã¢â€š ¬Ã…“Why invest in Hedge funds?à ¢Ã¢â€š ¬? simply is à ¢Ã¢â€š ¬Ã…“to make money.à ¢Ã¢â€š ¬? The common analogy in all hedge funds strategies and the underlying rationale for investing in hedge funds is the search for absolute returns. This is sometimes called alpha. Alpha is the extra return a skilled manager can produce over and above the market return (or beta). Whereas many conventional fund managers aim simply to outperform their chosen benchmark index, hedge fund managers seek to produce positive gains in all market conditions. https://www.fleetstreetinvest.co.uk/shares/trend-investing/hedge-fund-investing-00128.html Research Question By using quantitative study, I will try to answer the following questions: Why investors invest in hedge funds? To answer this question I will be looking at the return, risk and performance associated with investing in hedge fund and how the fund mangers. By looking at the annualised return, standard deviation and risk adjusted returns of different styles of hedge funds their performance can be measured. What are the issues relating the investment in terms of risk, return and performance measurement? Although hedge funds are popular in terms of an investment vehicle, there are various issues. The issues related are its cost/ management fee structures, collection of data, survivorship bias and selection bias. Various performance measure techniques are available for hedge funds too. I will be looking at some of the performance measurement approaches. Purpose There are several purpose for this paper. First is to give an overview of hedge fund as an investment vehicle with a short description of different characteristics and styles of hedge funds. Second is to describe why hedge funds are attractive for investors and fund managers by presenting different theories where risk and returns of hedge funds are investigated in order to evaluate the performance measures. Third purpose is to investigate the issues related to the investment in hedge funds where several sets of issues are evaluated and various performance measures are identified. LITERATURE REVIEW There is no one particular definition of hedge fund as mentioned earlier. According to the Investment Company Act 1940 of the US, hedge funds were defined by their low degree of regulatory controls. In comparison to mutual funds, hedge funds were seen to have higher level of risk. This led to a 100-investor limit as well as wealth requirement of the investors. Fung and Hsieh (1999) claim that another reason for 100-investor limit is the use of leverage and short selling in hedge funds. The limit restrictions were later abandoned and wealth requirement lowered. Many definitions of hedge funds have been cited-most of them mainly based on its characteristics. Some of them are: à ¢Ã¢â€š ¬Ã…“Investment companies that by their charter can buy on margin, sell short, hold warrants, convertible securities and commodities and otherwise engage in aggressive trading tactics in order to profit from forcasting market swings.à ¢Ã¢â€š ¬?- Polhman, Ang and Hollinger (1978) à ¢Ã¢â€š ¬Ã …“A mutual fund that employs leverage and uses various techniques of hedgingà ¢Ã¢â€š ¬?- Soros (1987) à ¢Ã¢â€š ¬Ã…“hedge funds are vehicles that allow private investors to pool assets to be invested by a fund manager. Unlike mutual funds, hedge funds are commonly structured as private partnerships and thus subject to only minimal SEC regulation. Moreover, because hedge funds are only lightly regulated their managers can pursue investment strategies involving, for example, heavy use if derivatives, short sales and leverage.à ¢Ã¢â€š ¬?- Bodie, Kane and Marcus (2008). Murguia and Umemoto (2004) claims that the reason why there is no proper definition of hegdge funds is because they are not classified by the different asset classes but by the type of strategies employed by the fund mangers is what classifies them. Such strategies range from very aggressive to conservative, which is the reason why there is no clear definition. Several studies have been carried out about h edge funds performance and risk issues. Fung and Hsieh (1997a) extend Sharpe (1992) style analysis and conclude that there are more diversified hedge fund strategies and suggested that hedge fund strategies are more dynamic. The literatures also conclude that option-based factors can enhance the power of explaining hedge fund returns. Brown, Goetzmann and Ibbotson (1999) examine the performance of offshore hedge funds and attribute fund performance to style effects rather than managerial skills. Brown, Goetzmann and Liang (2003) found, in a study using the TASS database, that fund of hedge funds reduce by a third the standard deviation of monthly hedge fund returns, as well as significantly reduce the value at risk of hedge fund investment. Hence, fund of hedge funds can also provide significant diversification potential. A well-diversified fund of hedge fund manager can therefore take advantage of market-specific risks while maintaining low correlations to stock, bond, and curre ncy markets. As a result of which the fund of hedge fund manager can provide superior returns and generate alpha which reflects managerial skills. More generally, since fund of hedge funds deliver more consistent returns with lower volatility than individual hedge funds, they are considered to be ideal for diversifying traditional portfolios. During 1993à ¢Ã¢â€š ¬Ã¢â‚¬Å"2001, fund of hedge funds outperformed the SP 500 index on a risk-adjusted basis (Gregoriou, 2003a). Koh, Koh, Lee and Phoon(2004) state that traditional asset allocation optimizes the use of equities, bonds, real estate and private equity to invest in a portfolio that maximizes returns and minimizes the portfolio risk. Thus, hedge funds become vital in enhancing returns in an investment portfolio. Following the growth in hedge fund industry, fund-of-hedge funds (FOF) have become more and more popular. Liang (2003) states that FOF mixes various strategies and asset classes together and creates more stable long -term investment returns than any of the individual funds. It invests in underlying hedge funds and diversifies the fund specific risks and relieves burdens on investor to select and monitor managers, and providing asset allocation in dynamic market environments. Fund-of-funds require less initial investment as compare to hedge funds and therefore are more affordable for small investors. To participate in the investment, small investors may be willing to pay extra fees as it might be the only way for them. Previous studies in this area by Brown, Goetzmann and Liang (2002) conclude that combining hedge funds with fund-of-funds not only causes the double counting but also hides the difference in fee structures between hedge funds and fund-of-funds. Liang (2003) state that a hedge funds charges a management fee and incentive fee while a fund-of-funds not only charges these fees at a fund-of-fund level but also passes hedge fund level fees in the form of after fee returns to the fund -of-fund investors whether or not the fund-of-funds make a profit. Brown, Goetzmann and Liang (2002) examine this issue and propose an alternative fee which provide a better incentive for fund-of-fund managers and reduce the cost for investors under the current fee structure, which is that the fund-of-fund managers absorb the underlying hedge fund fees and establish their own incentive fees at the fund-of-fund level. Liang (2003) conclude that because of the above issues fund-of-funds need to be separated from hedge funds in academic studies and address the difference in performance, risk and fee structures. However, the FOF mangers can add value to the portfolio through selection, construction and continuous monitoring of the portfolio. They provide professional services and have access to the information that are expensive and difficult to obtain otherwise. The FOF mangers quite often use different investment strategies and styles through a diversified portfolio of individua l fund managers. Considering these advantages for an investor, investing in fund of hedge funds is not cheap. The cost can be as high as the cost of buying a building, according to Koh, Koh, Lee and Phoon (2004). This structure allows for more diversified portfolio and much reduced risk at the fund level which comes at a price. More diversified the portfolio is it is more likely that it will incur more incentive fees. Therefore, there are many persuasive reasons why investing in hedge funds are considered as à ¢Ã¢â€š ¬Ã…“alternative investmentsà ¢Ã¢â€š ¬?. Some uninformed investors may be misled about the risks and returns on hedge funds as it relies heavily on statistical compilation from the database vendors which is filled with data bias such as survivorship bias and selection bias. Fung and Hsieh (2001a) found that estimates of survivorship biases differed across two commonly used databases, HFR and TASS. The survivorship bias was much higher in TASS than that in HFR. They estimated that survivorship bias would over-report hedge fund mean returns by about 1.5% to 3% per annum. Brooks and Kat (2001) stated that around 30% of newly established funds do not survive the first three years, primarily due to poor performance. Thus, not including defunct funds is likely to lead to over-estimation of the returns and profile of hedge fund industry.