One might ask, if they are restricted to the wealthy, why should anyone else care?
With over 8000 such funds now in existence, far more even than there are individual stocks in the S&P 500 Index and Nasdaq Composite Index combined, and a total market value of well over a trillion American dollars, they inevitably have a lot of influence on the rest of the money world.
It might seem that assets managed to control risk, particularly when their fund managers have strong compensation incentives to assure they are profitable, would be a stabilizing factor in the overall markets, rather like ballast for a ship, keeping things moving along on an even keel. In fact, though, since there are no regulators keeping the managers within any kind of bounds and the activities of the managers or even their holdings are virtually secret, a great deal of risk taking occurs. The strategies normally depend on mechanical systems of risk management that are supposed to work in predictable, and historically profitable ways. Secure in this expectation, managers tend to push the envelope. After all, it is much more lucrative for them if they can use more leverage or emphasize a riskier investment, perhaps boosting annual returns another 25-50% or more, than if they play things conservatively and with a margin of safety in mind. With those kinds of potential gains, the manager him- or herself, in a billion dollar fund might take home many extra tens of millions a year. If they had wanted to just invest conservatively, managers might as well have run a well diversified, fully disclosed, but far more modest fee mutual fund.
One difficulty is that, once riskier strategies are employed, particularly when there is little or no oversight, costly mistakes can occur. Because of the large dollar amounts involved, these may quickly have big repercussions.