|
|
Hedge Fund Facts and Figures |
Estimated to be a $1.1 trillion industry and
growing every year, with approximately 9000 active hedge funds.
Includes a variety of investment strategies, some of which use leverage
and derivatives while others are more conservative and employ little or
no leverage. Many hedge fund strategies seek to reduce market risk
specifically by shorting equities or derivatives.
Most hedge funds are highly specialized, relying on the specific
expertise of the manager or management team.
Performance of many hedge fund strategies, particularly relative value
strategies, is not dependent on the direction of the bond or equity
markets -- unlike conventional equity or mutual funds (unit trusts),
which are generally 100% exposed to market risk.
Many hedge fund strategies, particularly arbitrage strategies, are
limited as to how much capital they can successfully employ before
returns diminish. As a result, many successful hedge fund managers limit
the amount of capital they will accept.
Hedge fund managers are generally highly professional, disciplined and
diligent.
Their returns over a sustained period of time have outperformed standard
equity and bond indexes with less volatility and less risk of loss than
equities. |
|
Over the past ten years, the typical individual
hedge fund has produced risk adjusted
returns that are quite similar to the typical mutual fund manager.
However, individual
hedge funds have realized a much wider range of performance compared
with mutual funds.
• Indexes of hedge funds tend to display risk-adjusted performance
superior to traditional
active managers and passive benchmarks.
Volatility of hedge fund indexes is typically much lower than that of
mutual fund
indexes and equity benchmarks. This is because of the low correlation
among individual
hedge funds.
• The performance of hedge fund indexes can be closely approximated with
a portfolio of as
few as 20 hedge funds, suggesting a pooled fund-of-funds approach as a
viable alternative
investment strategy.
• Hedge fund portfolios also exhibit a low correlation with traditional
asset classes, suggesting
that hedge funds should play an important role in strategic asset
allocation.
We illustrate the efficacy of hedge funds for typical pension and
endowment funds using
MSDW’s asset-liability modeling framework.
• Evidence points to continued success for hedge fund managers.
– Historical performance of hedge funds appears to be based on the
exploitation of market
inefficiencies. Due to the expected growth in the supply of these
inefficiencies, the advantages
of hedge fund investments are not likely to diminish soon. Risk:
Investors should be well-informed of the actual risks of any prospective
investment, and also consider how the addition of this risk will affect
their portfolio as a whole. Interestingly enough, the addition of various
types of risk that are uncorrelated with, or dissimilar to, other kinds of
risk in the portfolio, may well have the effect of reducing overall risk.
This is one of the central objectives of diversifying into hedge funds.
Fees and expenses: Investors should determine the actual costs of the
investment. Generally, a hedge fund charges a management fee and an
“incentive fee,” which is based on net new profits. They also usually
charge and administrative fee and for legal and accounting expenses.
These charges should be relatively small, but will vary form fund to
fund.
Liquidity: Hedge funds generally can only be bought on a monthly basis,
and sold only at the end of a month, quarter or year. Advance written
notice, varying to 15 days to as much as 60 days, is usually also
required for liquidation. Most funds will allow investors to liquidate a
part of their investment, as long as the remaining invested capital
meets the minimum investment requirement.
It is important to understand the differences between the various hedge
fund strategies because all hedge funds are not the same , investment
returns, volatility, and risk vary enormously among the different hedge
fund strategies. Some strategies which are not correlated to equity
markets are able to deliver consistent returns with extremely low risk
of loss, while others may be as or more volatile than mutual funds. A
successful fund of funds recognizes these differences and blends various
strategies and asset classes together to create more stable long-term
investment returns than any of the individual funds.
Hedging Strategies A wide range of hedging strategies are
available to hedge funds. For example:
selling short - selling shares without owning them, hoping to buy them
back at a future date at a lower price in the expectation that their
price will drop.
using arbitrage - seeking to exploit pricing inefficiencies between
related securities - for example, can be long convertible bonds and
short the underlying issuers equity.
trading options or derivatives - contracts whose values are based on the
performance of any underlying financial asset, index or other
investment.
investing in anticipation of a specific event - merger transaction,
hostile takeover, spin-off, exiting of bankruptcy proceedings, etc.
investing in deeply discounted securities - of companies about to enter
or exit financial distress or bankruptcy, often below liquidation value.
Many of the strategies used by hedge funds benefit from being
non-correlated to the direction of equity markets
|
