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...