While regulators have imposed several new rules on banks on steep bonuses paid to investment banks, the situation for hedge funds is much different. The main factor that distinguishes the situation of hedge funds from other kinds of funds is the high degree of leverage used by fund managers to obtain higher returns.
Despite being an exceptionally high-income group, hedge fund managers still have relatively low salaries and bonuses compared to bank executives. The average annual salary of hedge fund managers is more than double the average wage earned by the average American. A quick analysis of the salary chart reveals that most hedge fund managers earn well above $250,000 per year.
The key reason behind the high salary of fund managers is the fact that they are allowed to keep a large part of their profits in the company. In general, the returns of the hedge fund company is more than double the return of a similar sized company. It becomes obvious that the high salaries and bonuses are the primary incentive to hedge fund companies to hire experienced managers. The high number of returns also enables hedge fund managers to take high risks in the field of financial investing and the growth of their fund.
As a result, it is very difficult for the government to regulate the growth of hedge fund management. A lot of changes are expected in the future to control excessive risk taken by fund managers. This will probably be achieved through the regulation of leverage and capital structure. This is because the government has realized that the hedge fund industry is likely to grow rapidly and the growth of such a business is bound to attract a number of new entrepreneurs who have less experience.
Although major regulations will be introduced to control the risks involved in the growth of this industry, many experts believe that the measures put forward by the regulators to date are too strong. There are several reasons why a lot of investors continue to lose their money in the hedge fund industry. Some investors are unwilling to adjust their strategy to meet the new regulations imposed on hedge fund companies. This leads to them taking greater risks, and in most cases, their efforts don’t pay off at all.
One of the major issues faced by many investors is the perception that the hedge fund industry is not regulated and that investors are largely in the dark about the true performance of the industry. Although this perception is not correct, there are some major changes that may be implemented in the next few years which will help investors get a better understanding of how the industry works.