Monthly ArchiveSeptember 2017

Hedge Funds

What are Hedge Funds?

Hedge Funds are minimal regulated investment partnership which uses a wide range of investment techniques and an array of assets that will generate a high return for a given level of risk.

Hedging means reducing risk, which is what many hedge funds are designed to do, a bit like making a risky bet with a person before making a conservative bet on the side.

Hedge Funds are managed to generate a consistent level of return, regardless of what the market does, although the risk remains, no matter the hedge fund strategy, though some hedge funds can generate a high level of returns for their investors, and others are unfortunate and don’t make a profit but end up making a loss.

In April 2012, the hedge fund industry had reached a record high of US$2.13 trillion total assets under management.

Another difference from normal mutual funds is the Manager Bonuses, a lot of hedge funds have a structure in place such as 2% & 20%  this means the hedge fund manager is paid an annual fee equaling 2% of the assets in the fund plus an additional bonus of 20% of the funds yearly profits. The hedge fund managers only receives a bonus if the hedge fund makes money.

The main component of hedge fund strategy involves selecting investments including: commodities, equities, fixed income and currency.

Hedge Funds Stocks and Shares

Leverage

A hedge fund will borrow a lot of money to maximise it’s returns, but this technique will also increase the funds risk, most funds will use leverage to increase the returns relative to the amount of money which they have in their account, though because of the high risk of using leverage, only investments which are considered to be of low risk tend to be used. Most hedge funds using leverage are likely to engage in extensive risk management practices.

Although compared to investment banks, hedge fund leverage is rather low; according to a National Bureau of Economic Research working paper, the average leverage for investment banks is 14.2, compared to between 1.5 and 2.5 for hedge funds.

Hedge Fund Managers

  • George Soros of Quantum Group of Funds
  • Bill Ackman of Pershing Square Capital Management LP
  • Paul Tudor Jones II of Tudor Investment Corporation
  • David Einhorn of Greenlight Capital,
  • Steven A. Cohen of Point72 Asset Management – formerly known as S.A.C. Capital Advisors
  • John Paulson of Paulson & Co. whose hedge funds as of December 2015 had $19 billion assets under management, compared to $18 billion in September 2013 and $36 billion in early 2011

Are some of the most well known of hedge fund managers.