Possibly a step too far

Author: | Published: 1 Sep 2007

The debate on hedge fund regulation is once again in the news because of turbulence in the US subprime mortgage markets after several hedge funds failed with their investments partly or entirely. In the US mortgage market earlier this year, default rates for loans to debtors with lower credit scores (subprime) increased, leading to the collapse of more than 20 institutions specializing in this market segment.

One cause of the precarious situation of hedge funds is that, because of the large number of hedge funds and the volume of investment being managed, it is becoming increasingly difficult to find investments that can match the high yields achieved in the past. To meet these targeted returns on investments irrespective of the current market (absolute return), funds can employ risky investment strategies or use borrowed money to leverage investments. If the interest payable on borrowed capital is below the expected return on...