Key us hedge funds industry facts

Key Characteristics Of Hedge Funds

* One of the primary objectives of hedge funds is that returns are market neutral. Diversification of investment portfolio and trading strategies are such that one can expect returns in both the market trends (up and down). * They employ leveraging and borrowing techniques for profit maximisation and amplifying returns. However, in India, consent from investors of a hedge fund need to be taken before borrowing money for investment purposes. * In India, hedge funds are relatively less regulated as compared to its counterparts such as mutual funds and other financial instruments. * There are no restrictions on investment avenues and thus hedge funds invest in almost every kind of financial instrument. They invest in a gamut of investment vehicles such as land, real estate, equities, debt securities which effectively helps in risk mitigation to a great extent. This wider investment latitude is what differentiates

hedge funds from conventional investment vehicles. * Hedge funds charge both an asset management fee as well as performance fee. Internationally, they take 2% of the total assets as expense fee and another 20% of the total returns as a performance fee. This makes hedge funds a little more expensive option for investment purposes. In India, there is no specific fee. Expense ratio can be 2% or below that as well and performance fee varies from 10% to 15% of the returns generated. * The minimum amount required for investment in hedge funds in India is ₹1 crore. This is too huge a sum for retail investors, who would rather invest in mutual funds through Systematic Investment Plan (SIP). ### KEY CHARACTERISTICS OF HEDGE FUNDS Many, but not all, hedge fund strategies tend to hedge against downturns in the markets being traded. Hedge funds

are flexible in their investment options (can use short selling, leverage, derivatives such as puts, calls, options, futures, etc.). Hedge funds benefit by heavily weighting hedge fund managers’ remuneration towards performance incentives, thus attracting the best brains in the investment business.

* Fund Terms: Hedge funds located in Pennsylvania charge the lowest average performance fee (17.54%) of the top 10 most active US states, with funds based in Virginia charging the highest average fee of 20.00%. Massachusetts-based vehicles charge the lowest mean management fee, at 1.25%, while those located in Illinois have the highest fee of any state (1.58%), on par with New York-based funds (1.57%). * Fund Performance: Hedge funds based in Texas have generated 3-year annualized performance of 8.96%, the highest of any of the top 10 US states, while Virginia-based vehicles have recorded returns of 8.13%. Hedge funds in Illinois, Connecticut and Massachusetts have fared less well over the same period, with annualized returns of 2.54%, 2.80% and 2.88% respectively. * New York: Over one-third (37%)

of US-based fund managers are based in New York, and collectively these firms hold $1.1tn worth of assets – 36% of global industry AUM. Furthermore, New York represents nearly half (46%) of US-based funds incepted since 2009. * Investors by State: New York has the most active institutional investors (544) of any state in the US, while California are second in the list with 341 investors located in the state. The 77 New Jersey-based investors have an average current allocation to the hedge fund industry of 18.8%, by the far the highest of any state. Hedge fund AUM below $1 trillion: New Finance Capital FRANKFURT (Reuters) - Hedge fund assets under management around the world have probably fallen below $1 trillion, a top executive at hedge fund

New Finance Capital LLP (NFC) said on Thursday. “There has been an enormous contraction in this industry. The industry is much, much smaller this year,” NFC co-Chief Executive and co-Chief Investment Officer Marc Hotimsky told a briefing for reporters. Assets under management were by now “probably slightly below $1 trillion,” he According to data from Chicago-based Hedge Fund Research, the hedge fund industry’s assets under management fell to $1.4 trillion at the end of 2008 from a record $1.9 trillion one year earlier. NFC, which UK fund manager Schroders SDR.L acquired in 2006, launched a new managed account investment vehicle two months ago, which invests only in exchange-traded futures. The strategy aims to generate positive returns in all market cycles, something Hotimsky said most asset managers were

unable to achieve with traditional buy- and-hold strategies. “The prospects of making a lot of money, or even preserving capital, are questionable,” he said, referring to conventional investments in fixed income securities such as government bonds. "Coca Cola KO.N credit default swaps (CDS) are trading tighter than most sovereign debts," Hotimsky noted. Coca Cola 5-year CDS trade almost 30 basis points below same-maturity CDS on Italy’s government debt and almost 10 basis points below Canada, according to Reuters data.

1. Open only to qualified or certified investors – Hedge fund investors need to fulfill specific net worth requirements. It is usually a net worth more than $1mn not including their primary residence. Or a yearly income surpassing $200,000 for the past two years. 2. Broader investment spectrum – A hedge fund universe is restricted only by its order. Hedge funds can invest in anything and everything. Be it currencies, land, derivatives, real estate, etc. In contrast, mutual funds are limited to bonds or stocks. 3. High use of leverage – Hedge funds generally employ leverage to increase their returns. This makes them prone to a broader range of risks. This was visible during the recession of 2007-2009. Hedge funds were hard-hit during the subprime meltdown. It

was because of the high exposure to collateral debt liabilities and high leverage. 4. Fee structure – Hedge funds charge a performance fee in addition to expense ratio. The most prevalent free structure is “Two and Twenty” or “2 and 20”. This means a 2% management fee and then a 20% share of profit. There are more much specific features which define a hedge fund. However, they are private investment tools. Hence, hedge funds can do anything they wish, provided; they reveal the strategy to investors. Such a broad range may seem risky. At times, it is risky. Some of the noteworthy financial turmoil involved in hedge funds. But, the flexibility of hedge funds has also led to some remarkable long-run returns. Suggested Reading: The Art

of Asset Allocation Summary: David M. Darst Suggested Reading: Investing in Bonds: Types, Benefits and Drawdowns


Key Billion Dollar Club Hedge Fund Investors Facts

Key Characteristics Of A Hedge Fund

Image Source: TZIDO SUN / Most hedge funds are structured as limited partnerships or companies. Some are however structured as trusts or trusts that issue notes backed by an institution. Hedge fund regulations vary from country to country. They are not always required to be registered – for example, in the US, only hedge funds with assets under management in excess of $100 million are required to register with the Securities and Exchange Commission (SEC). In most cases, they are not allowed to solicit investment or advertise their services. Hedge funds are generally only available to accredited investors – those with incomes or wealth above a certain amount.

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