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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.
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 I 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 hurdle rate?
The established minimum return an investor's investment
must make prior to the application of performance/incentive
fees.
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.
What is
a lock-up period?
This is the time period that you must hold your
assets ("lock-up" your money) within
a fund before they can be removed.
What can
I get for free from Eurekahedge?
There is no such thing as a free lunch, so we
do not provide food but free information instead;
via our monthly news, interviews and our archive
- in return we ask for all users to register.
You will receive access to our newsletters and
indices pages without any further obligation.
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.
Can the
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.
How many
funds are included in the Eurekahedge Database?
There are currently over 6,000 funds (inclusive
of obsolete funds to constitute a complete, historically
accurate, universe) included in the Eurekahedge
Database with new funds being added daily.
What type
of reporting style do the funds in the Eurekahedge
Database use? The Eurekahedge Database
contains funds reporting performance net of all
fees.
What is
the percentage of North American and non-North
American onshore funds versus offshore funds in
the Eurekahedge Database?
The Eurekahedge Database contains an approximate
50/50 North American onshore/ offshore split,
and our non-North American coverage has an approximate
30/70 onshore/ offshore split
In what
format is the Eurekahedge Database presented?
Eurekahedge makes it 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.
How often
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.
Who can
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.
For further information on Eurekahedge online products, please contact our sales staff for a FREE TRIAL:
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