Hedge Fund Modelling and Analysis Using Excel and VBA

1

The Hedge Fund Industry

The global credit crisis originated from a growing bubble in the US real estate market which eventually burst in 2008. This led to an overwhelming default of mortgages linked to subprime debt to which financial institutions reacted by tightening credit facilities, selling off bad debts at huge losses and pursuing fast foreclosures on delinquent mortgages. A liquidity crisis followed in the credit markets and banks became increasingly reluctant to lend to one another, causing risk premiums on debt to soar and credit to become ever scarcer and more costly. The global financial markets went into meltdown as a continuing spiral of worsening liquidity ensued. When the credit markets froze, hedge fund managers were unable to get their hands on enough capital to meet investor redemption requirements. Not until early 2009 did the industry start to experience a marked resurgence in activity, realising strong capital inflows and growing investor confidence.

This chapter introduces the concept of hedge funds and how they are structured and managed, as well as discussing the current state of the global hedge fund industry in light of the recent financial crisis. Several key investment techniques that are used in managing hedge fund strategies are also discussed. The chapter aims to build a basic working knowledge of hedge funds and, along with Chapters 2 and 3, to develop the fundamentals necessary in order to approach and understand the more quantitative and theoretical ...