|
|
| Home | About | Why Choose Us? | Client Case Studies | Articles and Opinions | Questions and Answers | Email Us |
|
Hedge Funds |
|
Originally, the term "hedge funds" meant pools of money that held short positions and long positions in equity securities.
Now hedge funds are operated according to many different investment strategies.
Still, there are some basic qualities that one sees across most of the universe of hedge funds. 1) Limited number of investors. This allows the fund to be exempt in many jurisdictions from regulations governing the the exotic instruments the hedge fund might use in it's trading activities. It also allows the hedge fund to have a different fee structure than a plain vanilla mutual fund. 2) More flexible in investment and trading strategies than plain vanilla mutual funds. 3) Different fee structure. Usually the fee is performance-based. A typical fee is is 1 to 2% of assets and 20% of profits. 4) High initial investment per investor. From 20,000 Euros up to 5,000,000 Euros. So the all encompassing term "hedge funds" may be misleading. Many hedge funds may not be hedged at all. Investment Strategies of Hedge Funds Aggressive Growth Hedge Funds: Invests in equities expected to experience acceleration in growth of earnings per share. Generally high P/E ratios, low or no dividends; often smaller and micro cap stocks which are expected to experience rapid growth. Includes sector specialist funds such as technology, banking, or biotechnology. Hedges by shorting equities where earnings disappointment is expected or by shorting stock indexes. Tends to be "long-biased." Expected Volatility: High Distressed Securities Hedge Funds: Buys equity, debt, or trade claims at deep discounts of companies in or facing bankruptcy or reorganization. Profits from the market's lack of understanding of the true value of the deeply discounted securities and because the majority of institutional investors cannot own below investment grade securities. (This selling pressure creates the deep discount.) Results generally not dependent on the direction of the markets. Expected Volatility: Low - Moderate Emerging Markets Hedge Funds: Invests in equity or debt of emerging (less mature) markets that tend to have higher inflation and volatile growth. Short selling is not permitted in many emerging markets, and, therefore, effective hedging is often not available, although Brady debt can be partially hedged via U.S. Treasury futures and currency markets. Expected Volatility: Very High Income Hedge Funds: Invests with primary focus on yield or current income rather than solely on capital gains. May utilize leverage to buy bonds and sometimes fixed income derivatives in order to profit from principal appreciation and interest income. Expected Volatility: Low Macro Hedge Funds: Aims to profit from changes in global economies, typically brought about by shifts in government policy that impact interest rates, in turn affecting currency, stock, and bond markets. Participates in all major markets -- equities, bonds, currencies and commodities -- though not always at the same time. Uses leverage and derivatives to accentuate the impact of market moves. Utilizes hedging, but the leveraged directional investments tend to make the largest impact on performance. Expected Volatility: Very High Market Neutral Hedge Funds - Arbitrage: Attempts to hedge out most market risk by taking offsetting positions, often in different securities of the same issuer. For example, can be long convertible bonds and short the underlying issuers equity. May also use futures to hedge out interest rate risk. Focuses on obtaining returns with low or no correlation to both the equity and bond markets. These relative value strategies include fixed income arbitrage, mortgage backed securities, capital structure arbitrage, and closed-end fund arbitrage. Expected Volatility: Low Market Neutral Hedge Funds - Securities Hedging: Invests equally in long and short equity portfolios generally in the same sectors of the market. Market risk is greatly reduced, but effective stock analysis and stock picking is essential to obtaining meaningful results. Leverage may be used to enhance returns. Usually low or no correlation to the market. Sometimes uses market index futures to hedge out systematic (market) risk. Relative benchmark index usually T-bills. Expected Volatility: Low Market Timing Hedge Funds: Allocates assets among different asset classes depending on the manager's view of the economic or market outlook. Portfolio emphasis may swing widely between asset classes. Unpredictability of market movements and the difficulty of timing entry and exit from markets add to the volatility of this strategy. Expected Volatility: High Opportunistic Hedge Funds: Investment theme changes from strategy to strategy as opportunities arise to profit from events such as IPOs, sudden price changes often caused by an interim earnings disappointment, hostile bids, and other event-driven opportunities. May utilize several of these investing styles at a given time and is not restricted to any particular investment approach or asset class. Expected Volatility: Variable Multi-Strategy Hedge Funds: Investment approach is diversified by employing various strategies simultaneously to realize short- and long-term gains. Other strategies may include systems trading such as trend following and various diversified technical strategies. This style of investing allows the manager to overweight or underweight different strategies to best capitalize on current investment opportunities. Expected Volatility: Variable Short Selling Hedge Funds: Sells securities short in anticipation of being able to rebuy them at a future date at a lower price due to the manager's assessment of the overvaluation of the securities, or the market, or in anticipation of earnings disappointments often due to accounting irregularities, new competition, change of management, etc. Often used as a hedge to offset long-only portfolios and by those who feel the market is approaching a bearish cycle. High risk. Expected Volatility: Very High Special Situations Hedge Funds: Invests in event-driven situations such as mergers, hostile takeovers, reorganizations, or leveraged buyouts. May involve simultaneous purchase of stock in companies being acquired, and the sale of stock in its acquirer, hoping to profit from the spread between the current market price and the ultimate purchase price of the company. May also utilize derivatives to leverage returns and to hedge out interest rate and/or market risk. Results generally not dependent on direction of market. Expected Volatility: Moderate Value Hedge Funds: Invests in securities perceived to be selling at deep discounts to their intrinsic or potential worth. Such securities may be out of favor or underfollowed by analysts. Long-term holding, patience, and strong discipline are often required until the ultimate value is recognized by the market. Expected Volatility: Low - Moderate Quantitative Hedge Funds: Uses complex computer programs and mathematical theories to automate trading in hedge funds. Some of the most successful hedge funds use this strategy. At Aegean, we focus on identifying the best hedge fund managers in the hedge fund business for our clients. |
| Funds of Funds | Funds of Hedge Funds | Hedge Funds | Mean Variance Optimization | Offshore Banking | Passive Investing |
| Private Equity Funds | Private Equity Funds of Funds | Venture Capital Funds | Venture Capital Funds of Funds | Wealth Preservation |
| Copyright © 2010 AegeanWealth.com. All Rights Reserved. |