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HEDGEFUNDS
An Overview
Upendra Badhai (BIF-056)Lakshmi Raghu (BIF-015)
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Definition
Private investment pools designed to zig when themarket zags
Investment vehicles that are organized so as toavoid the application of most securities laws
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vestopedia defines“An aggressively managed portfolio of investments that uses advanced investment
strategies such as leveraged, long, short andderivative positions in both domestic andinternational markets with the goal of generating high returns”
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Alternative
InvestmentsAlternative Asset Class Forecasted DemandedGrowth
Hedge Funds High
Private Equity ModerateVenture Capital, BuyOuts Moderate
ABS/MBS Increasing
Property ModerateEmerging Markets Moderate
Commodities Increasing
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Characteristics
Ability to deliver non-market correlatedreturns
Huge variety of hedge fund investmentstyles, many uncorrelated with eachother, provides investors with a wide
choice of hedge fund strategies to meettheir investment objectives
Generally available only to HNIs and
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CharacteristicsBroadly defined by their structural characteristics rather than their hedgednature
Benefit by heavily weighting hedge fund managers’ remuneration towardsperformance incentives, thus attracting the best brains in the investmentbusiness. In addition, hedge fund managers usually have their own moneyinvested in their fund
Lock in period for min of 1 year – Little liquid
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Take advantage of market inefficiencies
Focus on absolute performance
Great flexibility reg. asset classes, markets,trading styles, and instruments
Infrequent liquidity and redemption dates
High minimum investment level
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Minimal governmental regulation
Performance is derived not primarily from the returns of the underlyingmarkets (beta) but predominantly from managers. skill (alpha)
Most funds also have a “high water mark” that is intended to protectinvestors by requiring the manager to offset any losses withsubsequent gains before incentive fees are paid
Some Facts
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Hedge fund fees are high---they typically involve a management fee of 1% of assets and an
incentive fee of 20% of profits
Less transparency
Alfred W Jones, the reporter for Fortune Magazine created the first hedge fund in 1949
Some Facts
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Risks InvolvedMarket Risk
Strategy Risk
Liquidity Risk
Leverage
Company Risk
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Hedge Funds hadoutperformed
securities not only ona return basis but alson risk adjustedperformance basis
SOURCE: Harcourt,
Barclay
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Master feeder
structure
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Global Top Fund of
Hedge Funds
Source: The Hedge fund journal, 2010
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Global Top Hedge Funds(In terms of Growth)
Source: BarclayHedge, Morningstar, Jan2010
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US Top Hedge Funds
Organization AUM ($ Billion) RankJP Morgan AM 54 1
Bridgewater Associates 45 2
Paulson & Co 32 3Soros Fund Management 27.5 4
Och-Ziff Capital 24 5
D E Shaw Group 23.6 6
Source: The Hedge fund journal, 2010
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Europe’s Top Hedge
FundsOrganization AUM ($ Billion) Rank
Brevan Howard 31.54 1
Man Investments 24.30 2
Black Rock 21.66 3
BlueCrest Capital 20.50 4
Lansdowne Partners 14.30 5
Source: The Hedge fund journal, 2010
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Asia’s Top Hedge Funds
Organization AUM ($ Billion) Rank
Sparx Group (Tokyo) 4.146 1
Platinum (Sydney) 3.981 2Artradis (Singapore) 2.87 3
Source: The Hedge fund journal, 2010
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Leading Women in
Hedge Funds
ELENAAMBROSIADOU
FOUNDER &CEOIKOS, Cyprus
AUM: $ 1.5Billion
VICTORIAASTON-DUFF
MD, Angelo
GordonEurope,London
AUM: $ 21Billion
TERRI BECKS
PRESIDENT &CEOCampbell &Co,Baltimore
AUM: --
TANYABEDER
FOUNDER,SBCC Group,Newyork
AUM: --
d d S i
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Hedge Fund- Strategies1. Emerging Markets
Attractive because of the potential for very high returns. This is due to the overall fast growth of anemerging market compared to that of a more advanced market. Examples include Brazil, China, India, andRussia
Risk involved in emerging markets is much higher due to political instability,less liquidity, and currencyvolatility
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2. Short Selling
Selling shares without owning them, hoping tobuy them back at a future date at a lowerprice in the expectation that their price will
drop
The manager borrows securities from a prime
broker and immediately sells them on themarket and later repurchases them
Arbitrage using short sales -example
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3. Macro
Aims to profit from changes in globaleconomies, typically brought about by shifts ingovernment policy that impact interest rates,in turn affecting currency, stock, and bondmarkets
4. Aggressive Growth
Primarily equity-based strategy whereby themanager invests in companies, with smaller ormicro cap stocks, characterized by low or nodividends, but expected to experience strong
& rapid growth in EPS or generally high P/E
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6. Market Timing
Predicts the short-term movements of variousmarkets (or market segments) and based onthose predictions, moves capital from oneasset class to another in order to capture
market gains and avoid market losses. Themost typical asset classes are mutual fundsand money market funds
Unpredictability of market movements and thedifficulty of timing entry and exit from marketsadd to the volatility of this strategy
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7. Special Situations
Invests in event-driven situations such asmergers, hostile takeovers, reorganizations, orleveraged buyouts, bankruptcies, and
liquidations.
Profit from the spread between the current
market value and anticipated value followingthe event.
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8. Value
Equity-based strategy whereby the managerinvests in securities perceived to be selling atdeep discounts to their intrinsic or potential
worth
Manager takes long positions in stocks that he
believes are undervalued, can take shortpositions in stocks he believes are overvalued.
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9. Funds of Hedge Funds:
Invests in other hedge funds rather thandirectly investing in securities such as stocks,bonds,etc. These underlying hedge funds may
follow a variety of investment strategies
Exhibit lower risk than single-manager hedge
funds.
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10. Income
Primary focus on yield or current incomerather than solely on capital gains
11. Market Neutral
Invests similar amounts of capital in securitiesboth long and short, generally in the samesectors of the market, maintaining a portfoliowith low net market exposure
In a Nuts e
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In a Nuts e ..
Superior risk-adjusted returns in bear and bull
marketsAccess to some of the best talent in financialmarkets
Highly sophisticated, unbiased investing Transparency and regulation are improving dueto increasing institutionalization
The Future of Hedge Funds..HFs will become mainstream investments:
- institutionalized re ulated and trans arent