We are in the midst of hedge fund scandal; the most recent example would be the crumbling of Bayou Group, the Connecticut-based hedge fund with $400 million under management that is currently under investigation for fraud.

However, what ever does not kill a person makes the person stronger, and therefore, investors should use this situation not only as a model to sniff out trouble, but to also pinpoint potential trouble.

Funds employ risky trading strategies - like arbitrage, shorting stocks and betting on the future of commodities - in an effort to increase returns. For those that are willing to take a gamble, there is as much of a chance for victory as there is for defeat.

According to a study done by the Chicago-based research company Hedge Fund Research Inc., in 1990 there were 610 hedge funds totaling about $39 billion in assets. Today that number has significantly grown to 8,000 hedge funds totaling somewhere around $1 trillion.

The growth can be attributed to public pension funds, endowments and charities investing in hedge funds with high hopes of boosting their investment return.

Bayou's recent collapse sheds light on the fact that sometimes things are not as good as they seem, and that maybe it is wise to look and think twice before acting.


The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

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