hedge funds

 

Hedge funds are attracting a lot of investments. This change has been driven by the fact that banks have been forced to eliminate risk-taking. These changes have not affected personal finance or the best credit cards offers. This is, however, a financial trend that bears watching.

A hedge fund is comprised of numerous stocks, bonds and investments. That way if one piece fails, it doesn’t bring down the whole hedge fund. In recent years, trades have become so large that they may be distorting any reasonable price relationships. One such fund has been dubbed the London Whale and represents a $200 billion investment that has yielded $5 billion in profits.

The Volcker Rule pushes banks out of the speculation business. While some still make the best credit card offers, all must reduce their risk. As they do this, their employees who were trading and making big money, are reportedly moving to investment firms to seek their fortunes. Banks covered by Federal Deposit Insurance are required by the 2010 Dodd-Frank Act to quit taking so many risks with government-backed deposits. This may be good news for personal finance. It’s slowly rolling back the clock several decades to where banks were more interested in loans and credit cards.

Hedge funds, such as the so-called London Whale, are attracting traders from investment firms. Traders can pick up huge bonuses based on ten percent of their profits. This makes the hedge fund very popular among traders. By contrast, bank employees found their bonuses capped in the $100,000 range. While that might be plenty of money for the average person, it is nothing compared to the millions that a trader can make at a hedge fund.

The Volcker Rule seems to have worked with American banks. Corporate debt among 21 dealers has dropped from a high of $235 billion in 2007 to a far more reasonable $40 billion in 2012. Still these numbers could result in an unforeseen crash. JP Morgan, a large investment bank, has become entangled in major financial trouble.

Banks have been fighting the new rules. They are lobbying for a softening of the reforms that are hurting their profits. The banks repeatedly point out that the rules hurt U.S. banks abroad. Without a repeal, there is still a chance that U.S. banks will compete on a level playing field in Europe. European banks face growing restrictions on risk.