Market-neutral strategies attempt, as I mentioned earlier, to exploit differences in the valuation of various securities, while trying to protect themselves against overall market risk. Directional strategies entail finding macroeconomic trends and trying to predict future market movements. Event-driven strategies aim to identify securities whose prices will be affected by specific corporate events, such as acquisitions, mergers and bankruptcies. Neither of the latter two investment strategies is thus hedged in Jones’ original sense. Many hedge funds describe themselves as "multi-strategy” – they combine different strategies over time to achieve the highest possible earnings. This also applied to Amaranth, but the fact was that half of the fund’s assets were invested in forward contracts for natural gas. Many hedge funds also use complex trade strategies, where they try to find discrepancies between different derivative prices or maturities and their theoretical values. The well-known hedge fund Long Term Capital Management (LTCM), which crashed in 1998, was this type of fund. Developments internationally and in Sweden Over the past ten years, hedge funds have grown considerably, both in terms of number and the amount of capital managed. Internationally, the capital managed has grown by almost 30 per cent a year since 1998. Today the hedge funds manage approximately USD 1,000 billion, corresponding to around 5 per cent of the total capital managed internationally, divided between 8,000 funds. Most hedge funds are relatively small, most have fewer than SEK 800 million in managed capital and almost half of them have less than SEK 200 million. However, there are exceptions.

With regard to the hedge funds’ own activities, the concerns are based on three beliefs: •  Hedge funds’ activities are opaque. •  Hedge funds borrow substantially. •  Hedge funds are speculative and prone to herd behaviour. Let me comment on these points one by one. It is true that in most countries hedge funds’ activities are less than transparent (although not in Sweden). The authorities in many countries have little or no information about the funds’ activities or the persons active in them. This applies in particular to funds that are located off-shore, such as in Bermuda or the Cayman Islands. This creates not only a risk that risk concentrations build up, but also facilitate illegal activities. The number of cases where hedge funds are suspected of being involved in various forms of fraud has grown dramatically in the United States in recent years. My opinion on this point is clear: Hedge funds should of course be subjected to the same disclosure requirements as other financial institutions. The second source of concern concerns indebtedness. Unlike more regulated institutions, hedge funds can in principle have unlimited leverage. This may be worrying from a stability perspective. A high level of indebtedness naturally increases both the probability of and the effects of a failure. The debt/equity ratio varies, but the fact is that most hedge funds are not heavily leveraged. To get a rough idea of the indebtedness of a fund one may simply divide the fund’s market value by its equity.