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Economists Caution Investors on Hidden Risks of Hedge Funds

This article appears courtesy of Institutional Investor

Source: Stanford Knowledgebase

STANFORD GRADUATE SCHOOL OF BUSINESS — High fees, inconsistent data, and difficult-to-understand risks are reasons for individual investors to avoid or minimize their investments in hedge funds, caution a group of 32 senior financial economists, including three from Stanford, in a new report.

The rapidly growing hedge fund industry badly needs standard measures of performance and risk, the economists say, because conflicts of interest exist and investors do not have efficient ways to compare the actual performance and risk of more than 8,000 funds that now hold $1 trillion in investments. The economists also recommend that banking regulators discourage speculators from taking big risks with hedge funds by making it clear that the government will not rescue troubled funds in the future.

These concerns are detailed in a 7-page report by the Financial Economists Roundtable (FER), a group of distinguished finance researchers who have met annually since 1993 to discuss microeconomic policy issues in the United States and elsewhere. Their report reflects a consensus among the majority of members who attended the 2005 meeting in July and is signed by 32 members who supported the statement.

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