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What is a Hedge Fund?
There is
no definition that is correct. And, this is
nice for some people. When you can not define something, you can
not regulate it :)
A hedge fund is a
collective investment undertaking.
This means next to nothing. Could be anything.
Welcome to the hedge funds world.
“Hedge funds” are
not homogeneous financial products. In some legal systems, they
are flexible investment vehicles, where managers operate without
limits. Hedge funds allow
the use of sophisticated management techniques such as short
selling, leverage, derivatives contracts (swaps, forwards,
options, futures etc.).
This can be very profitable. This can be very dangerous too.
How Risky Is a
Hedge Fund? It depends on the fund. Don't believe that all hedge
funds are extremely risky.
A high risk strategy is not suitable for everybody. It can be good
for the rich. Many countries have laws and regulations in place to
protect the poor. This is the reason we often read that hedge
funds are the investment vehicles suitable for the rich. The poor
don't usually understand that the laws protect them, but they
believe that they are excluded from the great opportunities only
the rich have.
Many hedge fund
managers also don't find so many rich people willing to invest.
they always have the temptation to market and sell to ordinary
people. There is a cost for that - they become regulated hedge
funds, and there is a drastic reduction in the manager’s freedom
to determine the content of the investment. A number of funds now
permitted under
UCITS III could be characterized as hedge funds. We still call these investment pools "hedge funds", but there are very different. Hedge funds are not unregulated, they are simply more loosely regulated than mutual funds and common trusts run by bank trust departments. Private equity partnerships, venture capital funds, and some real estate partnerships are also loosely regulated, but they are not hedge funds. Mutual fund investors may redeem shares at any time, so mutual fund managers spend a lot of time to deal with investors, daily valuation etc. In contrast, hedge funds allow entry or exit only at certain times of the year, monthly, quarterly, or annually, and may restrict redemptions for one or more years. Hedge fund managers can spend their time to make money. Many hedge funds can keep their actions relatively secret, handled by offshore companies in places like the Cayman Islands, where regulation looks perfect for these vehicles. There is increasing pressure from the regulators around the world to disclose more information. The SEC has proposed to require all hedge fund management companies to register as investment advisers. Absolute return strategiesIn traditional money management, returns are compared to a benchmark like the S&P 500. If the S&P 500 is down 10% and our fund is down only 8%, our losing money investment is great. Absolute return strategies lead to profits regardless of what happens to any index. The hedge fund manager is judged only on the size and consistency of returns. Investors refuse to invest in hedge funds that have less than two years of good performance... they refuse to invest also in hedge funds that are more than 8 years old... as they believe that hedge funds don't survive longer than about eight years. |
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