What is a Hedge Fund?
Hedge
funds are made up of capital pooled by multiple investors for the purpose of
investing in a variety of ways. They
are generally not subject to extensive government regulation because they are
private funds not sold to public or retail investors. Hedge fund managers are usually highly experienced,
accredited financial professionals and employ a myriad of advanced investment
strategies to generate return.
These strategies include but are not limited to leverage, short selling,
long and derivative positioning, futures, emerging markets and distressed firm
investment.
Hedge funds receive aggressive personal attention from managers who usually have
either a personal stake in the fund they manage or an otherwise strong
financial incentive to generate high return. Hedge funds are typically oriented toward absolute rather
than relative profitability, making it possible to receive revenues during
times of both a rising and falling stock market.
 |
| Red= Dow Jones Credit Suisse Hedge Fund Index |
Who
Can Invest in a Hedge Fund?
Legally,
hedge funds are private investment partnerships limited to a specified number
of investors capable of providing a relatively large initial investment. Investors are usually required to
demonstrate a high personal net worth before they are allowed to invest in a
hedge fund. Investment is
relatively illiquid and open ended.
Typically, terms are structured such that investors may withdraw their
money at previously specified, regular intervals. Today, traditionally conservative pension funds and other
institutional investors such as university endowments are investing in hedge
funds.
How
is a Hedge Fund Different than a Mutual Fund?
Mutual
funds, like hedge funds, are made up of a pool of funds from multiple
investors. Money market managers
manage these funds and focus on stocks, corporate bonds, sovereign debt, and
money market instruments. Such a
strategy is more traditional than the strategies employed by hedge fund
managers. Mutual funds allow small
investors to participate in gains from investment in a diverse portfolio of
stocks and bonds without having to single handedly raise the large amount of
capital required to build a diverse personal investment portfolio.
Hedge
funds are more exclusive than these publically available mutual funds and, as
noted earlier, require much more initial investment than mutual funds
require. Also, hedge funds are oriented
toward a more aggressive strategy.
Mutual funds do not, and are prohibited by regulation in many cases,
from employing the alternative tactics that hedge funds are able to profit
from.
How
do hedge funds manage risk? How
risky is investing in a hedge fund?
The
term “hedge” implies the hedging of risk. Hedge funds generally seek to reduce
risk and produce adjusted return usually uncorrelated with movement in market
indices. For example, between 1993
and 2010, hedge funds were 1/3 less volatile than the S&P 500 stock
index. Fund managers are some of
the most experienced financial professionals in the world and have extensive
experience with risk management.
While investment in a hedge fund may be relatively illiquid, fund
managers tend to keep their fund’s investments liquid. Risk is also checked by operational due
diligence on the part of investors and their personal financial advisors. Some hedge funds are riskier than others
and investors must evaluate what kind of hedge fund they wish to invest in
before risking their money.
How
are hedge funds Currently Performing?
Generally,
hedge fund performance can be difficult for the public to obtain. However, several hedge fund indices are
available and some individual hedge funds are listed (but not traded) on
international stock exchanges.
Others report performance summaries to industry journals or consulting
firms.
Last
year was a difficult year for hedge funds, especially in the fourth
quarter. Data on 2012 returns
collected so far suggests hedge fund returns are on the way back to positive. Risk relative return, formally referred to as “alpha,”
was generally positive in the first two months of 2012 for most types of hedge
funds. Improved global outlook and
rallies in equity and credit markets have supported this positive hedge fund
performance. Many analysts are
expecting this positive trend to continue. These analysts point to a greater risk appetite in 2012 and
strong emerging market hedge fund performance as indicators of a relatively
prosperous 2012 for hedge fund investors.
 |
| Red= Dow Jones Credit Suisse Hedge Fund Index Aug 2011- Feb 2012 |
 |
| Dark Blue= HFRI Hedge Fund Index; note stability relative to bonds and equity markets |
Why
should a hedge fund be a part of my portfolio?
Hedge
funds offer the opportunity to engage in investment strategies that require
both a large amount of risk exposed capital and careful attention. By becoming a hedge fund partner,
investors can gain from both pooled risk and full time monitoring of their
investment. Additionally, hedge
funds can provide a private portfolio with returns regardless of fluctuations
in market performance. Adding
hedge funds to a portfolio is one more way to diversify a personal portfolio
and hedge risk across a variety of investment categories.
How
can I start investing in a hedge fund?
Interested
investors should, as always, consult with a personal financial advisor before
embarking upon any investment. An advisor
will help his or her client find a hedge fund that aligns with the client’s
personal financial goals and then assist the client in making an initial
investment. Once a client is an
investor in a hedge fund, advisors will continue to work with the client to monitor
hedge fund performance and provide operational due diligence.
0 коммент. :
Отправить комментарий