Executive summary - Udo Bullmann

market to promote the knowledge-economy of Europe. But our main topic in this report is HFand PE funds, especially the so-called leverage buy-out funds..It is highly important to underline again that the alternative investment industry is heavilyderegulated and opacity is its general rule. Consequently it is not possible to gather publicinformation concerning products and managers, as it is in the case of the UCITS industry. Afull understanding of the current size and shape of the market, of its most relevant featuresand of its trend is necessarily influenced by these limitations. However, the report is based onindustry sources, a whole range of important, new publicly accessible research and a set ofconcrete case studies (see annex).1. Hedge fundsIn the following pages we will try to offer an analytical and comprehensive picture of thehedge funds industry, focusing on its European segment.Hedge funds are a recent development in Europe. The purpose of hedge funds has beentwofold:1. To create an opportunity to secure the overall development of an investor’s activeportfolio.2. To create a profit by betting on different market developments between differentactives/passives of the same type.The achievement of the above was attained through varying long/short strategies indifferent areas. This could happen through buying and selling of assets, through futures, orthrough acquisition or issuance of options. It could also be through a combination of suchcontracts, including the conclusions of SWAP-deals 1 .In recent years the general fall in interest rates has led to a change of the business model ofmany hedge funds. Decreasing rates have on the one hand led to a large inflow of capitalbecause the investors in hedge funds expected a higher return on investment than throughtraditional interest-rate-bearing products. On the other hand, the hedge funds haveincreasingly placed their investments in stocks instead of market-neutral, interest-rate-bearingassets. Many hedge funds have thereby become overexposed to investments in stocks, whichcan be seen from the fact that indices of share prices of investments in hedge funds havefollowed the developments of the international stock indices.This in turn has made hedge funds look more like the stock-based investment funds where1 A swap is a derivative, where two counterparties exchange one stream of cash flows against another stream.These streams are called the legs of the swap. The cash flows are calculated over a notional principal amount.Swaps are often used to hedge certain risks, for instance interest rate risk. Another use is speculation.4