About hedge funds
About hedge fund investing
About Eurekahedge databases
About hedge funds
What is a "Hedge Fund"?
Hedge funds are investment vehicles that explicitly pursue absolute returns on their underlying investments. The appellation "Absolute Return Fund" would be more accurate, not least as not all hedge funds maintain an explicit hedge on their portfolio of investments. However the "Hedge Fund" definition has come to incorporate any absolute return fund investing within the financial markets (stocks, bonds, commodities, currencies, derivatives, etc) and/or applying non-traditional portfolio management techniques including, but not restricted to, shorting, leveraging, arbitrage, swaps, etc. Hedge funds can invest in any number of strategies and they are perhaps most readily identifiable by their structure, which is typically a limited partnership (the manager acting as the general partner and investors acting as the limited partners) with performance related fees, high minimum investment requirements and restrictions on types of investor, entry and exit periods.
What does it mean to "hedge"?
Not, in fact, an esoteric gardening term, to "hedge" means to manage risk. Any given money manager may make an allocation/investment that could be described as speculative; if this same manager simultaneously makes an allocation to an allocation/investment specifically designed to balance or counter-act any negative performance from his speculative position then this would be his hedging position. There are many types of perceivable risk - Market, Interest rate, Inflation, Sectoral, Regional, Currency, etc. Hedge fund managers utilise the complete arsenal of financial weapons (holding cash, short selling, buying selling or swapping options, futures, commodity and/or currency futures, etc.) and are expert in concocting hedging positions for most conceivable risks.
Are all hedge funds hedged?
No (and this raises the question of how they can call themselves "hedge" funds as touched on elsewhere), some funds may be long-only in stocks, and may even use leverage- making them explicitly speculative and "un-hedged". The correct questions to ask regarding hedge or absolute return funds revolve around how much perceivable and quantifiable risk underlies its returns. Thankfully, there are lots of clever mathematical formulae and clever mathematical people who will be able to help you with this.
Are all hedge funds highly aggressive?
No again. In fact a true hedge fund is, in theory, less speculative than a long-only "traditional fund". Of course there are some real bat-swinging, aggressive hedge funds, but there are also many others that explicitly and methodically pursue consistency of returns and/or preservation of capital. Of course this is not sensationalist or sexy, so this aspect of hedge fund finance seldom sees the light of day within the media.
What types of strategies do hedge funds employ?
You name it and a hedge fund somewhere is probably doing it (or will be able to)! From buy-and-hold to currency arbitrage to futures and options to distressed debt positions, hedge funds can allocate to any and all (depending on their declared style and strategy). The majority of the hedge fund universe is involved in relatively plain vanilla positions, but sexy finance makes the news so hedge funds collectively are invariably associated with the arcane minority.
Involves the purchase of an asset followed by immediate resale, exploiting pricing inefficiencies in a variety of situations in similar or different markets. It is usually regarded to have low risk, but this may differ depending on the circumstances. The most basic form of arbitrage is triangle arbitrage, where an asset is being sold at two different prices at different markets. Such gaps are often closed off almost instantly. Merger arbitrage takes place following M&A announcements as funds may purchase stocks of the target company and short the stocks of the acquiring company. Capital structure arbitrage involves taking advantage of pricing anomalies among different securities issued by the same or related firm. Includes managers who trade in convertible arbitrage (long volatility), option arbitrage (long or short volatility), share class arbitrage, etc, or a combination of these strategies. For example, a fund might go long on a high yield bond and short the stock of the company. Given the nature of opportunities pursued, returns tend to be market neutral.
Uses the implicit call option embedded in a convertible offer to cover a short position in the stock which it can be converted into. When the call decision needs to be made, if the stock price has taken a huge fall, closing the short position would more than compensate for the loss in the bond position. On the other hand, if the stock’s price has spiked, the rise in the convertible position would more than cover the loss in the short position. During the holding period, returns would include the coupon rate on the bond plus the interest on proceeds from the short sale.
Invests in currencies, commodity futures, government securities, options and forex contracts either directly or through a Commodity Trading Advisor (CTA) who are regulated in the United States by the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA).
Invests in the debt of companies that are sick, bankrupt or in the course of a turnaround at deep discounts. Given the nature of these securities, there is selling pressure in the market as many of the institutional investors cannot own below investment grade securities. This results in lower demand, coupled with the negative publicity of a bankruptcy filing, leading to an undervaluation which this strategy is trying to capitalise on.
A strategy or trade that involves taking an unhedged view on an investment.
Exploits opportunities in specific situations, such as restructuring, mergers, public offerings, liquidation, leveraged buyouts or hostile takeovers, and is generally unaffected by the movements in the market or trends. They need not necessarily be limited to any particular investment style or asset class. One example of an event driven arbitrage strategy is merger arbitrage, distressed debt, or more generally speaking, distressed securities.
Invests in fixed income securities (long, short or both) and/or fixed income arbitrage (exploiting pricing anomalies in similar fixed income securities) opportunities, usually along with the use of leverage. For this strategy, they may focus on interest rate swaps, forward yield curves or mortgage-backed securities.
Long-Only Absolute Return:
Funds that employ an absolute return strategy but by focusing only on the long side of the markets they invest in. Any of the following investment styles may be used:
A strategy which consistently has more long than short positions in a portfolio.
Attempts to hedge out market risk by investing on the long (buy then sell as prices rise) as well as short (borrow, sell and buy as prices go down, and settle the loan) side of the equity markets. The fund’s net exposure to the markets is reduced if not completely hedged out, owing to the short-selling. Managers shift from stocks of small values to that of large ones, resulting in a tilt in the net long or short position to gain returns. Absolute returns are accentuated by such use of leverage and may also make use of options and futures. Note that this strategy is different from a true equity market neutral strategy. The key difference lies in the fact that the manager is betting that one stock will do better than the other relatively, regardless of the general market movement.
A top-down strategy that tracks and profits from global macro-economic directional shifts or changes in government policies. This, in turn, affects foreign currencies/economies, interest rates and commodities. Managers using this strategy are usually involved in all kinds of markets, such as long/short equity, fixed income, foreign exchange futures, bonds, etc. The use of leverage (and derivatives, in particular) accentuates the impact of market movements on fund performance.
A strategy where the portfolio has balanced long and short positions, either by sector or stock.
A strategy that seeks to benefit from the shared price movements of companies involved in mergers.
Adds a further layer of diversification to asset allocations (as opposed to merely diversifying across asset classes) by investing in more than one of the strategies described here. To loosely analogise, a multi-strategy fund would be the single-manager fund equivalent of a fund of hedge funds. The volatility for this strategy is considered to be variable.
A strategy operated by managers who seek to exploit equity market inefficiencies by running perfectly matched equity long and short portfolios within the same country or sector. The portfolio is beta neutral. This is an overarching classification and encompasses all strategies that use pair-trading, leverage in a variety of securities and aim to hedge out market risk. For instance, fixed income arbitrage, capital structure arbitrage and long/short equities are all technically relative value strategies.
Similar to merger arbitrage.
As can be clearly seen from above, some strategies are specific to a particular asset class or style and some are broader in scope. As a result, overlaps are inevitable. As a database provider, we feel this is an appropriate categorisation of the myriad of hedge fund strategies out there and we encourage participating funds to slot themselves accordingly. Therefore, funds pursuing arbitrage opportunities with a partial allocation to merger arbitrage would be classified under ‘Arbitrage’, but a fund exclusively allocating to merger arbitrage would be slotted under ‘Event Driven’.
About hedge fund investing
Who typically invests in hedge funds?
Usually defined as "Accredited Investors", various institutions, corporate treasuries, endowments, fund of funds, family offices, private banks and pensions invest in hedge funds.
What is an
Accredited Investor/Qualified Purchaser?
This can vary from jurisdiction to jurisdiction, depending on the investing process in question and is something that each individual should verify within their own Jurisdiction prior to investing with a hedge fund. Put simply, if you cannot afford to lose the money you invest then you should not be looking at hedge funds as a viable investment route.
What is the minimum investment?
The minimum investment varies from fund to fund. Although some funds are charging as low as US$10,000 these are very much the exception and a common starting range would be between US$250,000-$500,000. Established funds can have much higher minimums; $10,000,000 or more, depending on the fund and manager. The fund manager can waive the minimum at his sole discretion but this is usually only undertaken to accommodate serious investors who stipulate an intent to allocated substantially more than the stated minimum, depending on how this initial allocation performs.
What fee structure do most hedge funds adopt?
Hedge funds fee structures vary, dependant on jurisdiction, domicile and, most importantly, investor base. The most common fee structure is the standard "1 and 20": a 1% management fee (% of assets) and 20% performance fee (% of profits), annually (Normally the management fee is collected in .25% quarterly trenches, in advance, and the performance fee is calculated annually). In addition to this, there are other performance-related restrictions and expansions on the collection of fees: high-water marks and hurdle rates being the most common.
Are hedge fund returns reported before or after fees?
Most funds report their returns from previous years "net of all fees." (net of management fees and incentive/performance fees). However, some funds report gross returns or returns net of management fees but gross of incentive /performance fees. Other variations occur but, regardless of which reporting method is received, the majority of hedge funds stipulate that pre-audit figures are subject to adjustment after year end (usually a minor or nominal adjustment).
What are "offshore" hedge funds?
Offshore hedge funds are vehicles, registered/domiciled in offshore jurisdictions, designed to allow investment in a fund without being exposed to the strictures of tax law in any given onshore legislation.
Who can invest in offshore hedge funds?
Anyone with offshore money can invest in offshore hedge funds. Getting the money off shore without incurring the same tax the offshore structure has been established to avoid is the issue here and this differs from legislation to legislation.
Do investors still pay fees even if the fund loses money?
The investor always pays the management fee on assets held within the fund, but performance fees are applicable only after positive performance has been achieved (even then a hurdle rate or high water mark may grant the investor exemption of performance fee payment).
What is a high water mark?
Where a hedge fund applies a high water mark to an investor's money, this means that the manager will only receive performance fees, on that particular pool of invested money, when its value is greater than its previous greatest value. Should the investment drop in value then the manager must bring it back above the previous greatest value before they can receive performance fees again.
About Eurekahedge databases
Why do your charge for your hedge fund data?
Eurekahedge prides itself on delivering a data service that fits the needs of our clients. We are working to a world class vision and this means that we must plough fees generated back into our business to continue tracking, updating, and interviewing hedge fund managers globally. With the anticipated high level of start-up activity and the rising level of attrition in the industry, maintaining an accurate overview of the universe requires the best possible resources. This is what Eurekahedge charges a premium to maintain.
returns posted on Eurekahedge differ from the
actual returns of the fund?
Of course, and we do not audit the figures provided so there are no guarantees. However, what you get with Eurekahedge is an authorised NAV figure, either direct from the investor update list or from the fund administrators.
In what format is the Eurekahedge Database presented?
Eurekahedge make its data available either through a subscription to our own database online or through data-feeds, issued on regular basis to our premium clients. Our data-feeds, to date, have been compatible with any format asked of us.
are updates to the Eurekahedge database made available?
The Eurekahedge Database is updated on an ongoing basis, throughout the working day. We release our datafeeds and indices data every day at 00:00 GMT and these are made available to download from our website at this time.
subscribe to the Eurekahedge Database?
The Eurekahedge hedge fund database suite is available to accredited investors or affiliated professionals only. We do however make exceptions for academic institutions and their members who require market leading data on the hedge fund universe for research purposes.
Who are Eurekahedge’s current users?
Eurekahedge’s accredited investors and premium subscribers include, but are not limited to the following: treasuries, trusts and endowments, family offices and multi-family offices, pension funds, institutional investors, sovereign wealth funds, private banks, portfolio managers, financial advisors, hedge funds, funds of funds, prime brokers, administrators, market research firms, Islamic funds.
Where could I read about latest hedge fund trends?
Eurekahedge has been publishing a monthly report since October 2008 and is the most in-depth source of information on the global hedge fund industry available today. The report features expert analysis on asset flows, hedge fund performance and regional key trends, as well as the league table of top-performing funds across region. The main contents of the report are wholly researched and written by Eurekahedge and do not contain contributions. Issues of The Eurekahedge Report can be found here.
The Eurekahedge Hedge Fund Index: The world’s largest equal weighted suite of over 200 alternative fund indices. With subsets based on region, country, strategy and fund size, it is a popular benchmarking tool for single- and multi-manager clients seeking to benchmark against a relevant index that more closely mirrors their regional and strategic mandates and for investors looking to ensure that their managers are outperforming a "bucket" of their peers.
The Mizuho-Eurekahedge Index: An asset weighted suite of indices. It is an interactive index that provides free access to bespoke indices online and allows the creation of customized indices by strategy and investment region. Utilizing a new and rigid methodology, this suite of global indices can easily be customized by investors for portfolio benchmarking and the building of investment products such as ETFs, investible indices and replication indices.
The Eurekahedge ILS Advisers Index: ILS Advisers and Eurekahedge’s collaborative equally weighted index of constituent funds. The index is designed to provide a broad measure of the performance of underlying hedge fund managers who explicitly allocate to insurance linked investments and have at least 70% of their portfolio invested in non-life risk.
More information on the Eurekahedge indices and methodology can be found here.
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