Calculations show that for the most indebted Swedish hedge fund this measure is 320 per cent, compared with a median of 80 per cent. An international study from 2003 shows that the debt/equity ratio was less than 200 per cent in more than 80 per cent of the funds examined. These are modest levels in comparison with financial institutions. For example, the major Swedish banks have a debt/equity ratio of 2,300 per cent on average. Thirdly, hedge funds are often accused of engaging in herd behaviour, that is, of imitating one another's behaviour and taking similar positions. This type of strategy risks reinforcing market fluctuations and having a destabilising effect. This applies in particular to macro funds, which take positions and investment decisions on the basis of an expectation of macroeconomic developments. For example, it is often claimed that hedge funds were involved in and reinforced the effects of the ERM crises. The evidence is not clear-cut. I believe that it is difficult to claim that hedge funds follow the prevailing trend to a greater extent than other investors. Traditional investors often have limits that force them to sell when there is a sharp fall in the price of an asset. This could in turn lead to a selfreinforcing spiral. The absolute, rather than relative, required rate of return on hedge funds should reduce the incentives for herd behaviour.
LTCM – which was gigantic – had at most a capital of around SEK 70 billion. This can be compared, for instance, with the state pension funds in Sweden, which each manage capital amounting to around SEK 150 million. The hedge fund market has also developed rapidly in Sweden. Brummer & Partners were first in Sweden, with their hedge fund Zenit, in summer 1996.Nektar, which operates in the fixed income and foreign exchange market, and originally followed Jones’ ideas completely, came soon after. Since then around 60 more funds have been established and the capital managed has gradually increased. Today, hedge funds account for a good six per cent of the total capital managed in Swedish-registered funds. This percentage has more than doubled over the past ten years and now corresponds to just 2 over SEK 85 billion. The size of the Swedish hedge funds varies substantially. The largest Swedish hedge fund had at the end of June 2005 a market value of a good SEK 26 billion, which is a considerable sum even in an international perspective. The smallest fund at the same time had a negative market value of SEK 5 million. The median fund had a market value of around SEK 225 million. [Figure 1] The hedge funds’ earnings over the past ten years may not appear that fantastic at first glance. One of the largest hedge fund indices, Credit Suisse/Tremont has over the past twelve years had an average increase in value of around 8 per cent, similar to the S&P 500.