Tuesday, June 10, 2008

How do Hedge Funds Work

Since they are unregulated, they can make investments without scrutiny by the SEC. Unlike mutual funds, they don’t have to report quarterly on their holdings. This means no one really knows what they are invested in. Their use of derivatives (complicated financial instruments, like options and futures contracts, that derive their value by reference to an underlying asset or index) means that, with little actual money invested, they have the capability to create large swings in the market. For example, many experts have said that the run-up in oil prices in July of 2006 was caused, in part, by hedge funds.

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