Hedge Funds as an investment option

ByHarleen Kaur D-21 Gaurav Dave D-35 Sunit Kalkoti D-46 Sachin Yadav D-11 Rajesh Kumar D-56

What is hedge fund?

A hedge fund is an investment fund that can undertake a wider range of investment and trading activities than other funds, but which is generally only open to certain types of investor specified by regulators.

Investors are typically institutions, such as pension funds, university endowments and foundations, or high net worth individuals, who are considered to have the knowledge or resources to understand the nature of the funds.

As a class, hedge funds invest in a diverse range of assets, but they most commonly trade liquid securities on public markets.

They employ a wide variety of investment strategies, and make use of techniques like long & short positions, use arbitrage, buy & sell undervalued securities, trade options or bonds, and invest in almost any opportunity in any market where it foresees impressive gains at reduced risk.

Continued
Hedge funds are typically open-ended, meaning that investors can invest and withdraw money at regular, specified intervals. The value of an investment in a hedge fund is calculated as a share of the fund's net asset value, meaning that increases and decreases in the value of the fund's investment assets (and fund expenses) are directly reflected in the amount an investor can later withdraw. Most hedge fund investment strategies aim to achieve a positive return on investment whether markets are rising or falling. Because hedge funds are not sold to the public or retail investors, the funds and their managers have historically not been subject to the same restrictions that govern other funds and investment fund managers As of 2009, hedge funds represented 1.1% of the total funds and assets held by financial institutions. As of April 2012, the estimated size of the global hedge fund industry was US$2.13 trillion

Key Characteristics of Hedge Funds

Hedge funds vary enormously in terms of investment returns, volatility and risk
Hedge funds have the ability to deliver nonmarket correlated returns. Many hedge funds have as an objective consistency of returns and capital preservation rather than magnitude of returns. Most hedge funds are managed by experienced investment professionals who are generally disciplined and diligent.

Pension funds, endowments, insurance companies, private banks and high net worth individuals and families invest in hedge funds to minimize overall portfolio volatility and enhance returns.

Most hedge fund managers are highly specialized and trade only within their area of expertise and competitive advantage.

Hedge funds benefit by heavily weighting hedge fund managers remuneration towards performance incentives, thus attracting the best brains in the investment business. In addition, hedge fund managers usually have their own money invested in their fund.

Features of hedge fund

An accredited investor is an individual person with a minimum net worth of US$1 million or, alternatively, a minimum income of US$200,000 in each of the last two years and a reasonable expectation of reaching the same income level in current year. For banks and corporate entities, the minimum net worth is US$5 million in invested assets. Maximum no of investors per fund is 100 Management fees are calculated as a percentage of the fund's net asset value and typically range from 1% to 4% per annum, with 2% being standard The performance fee is typically 20% of the fund's profits during any year, though they range between 10% and 50% Hedge funds share only the profits and not the losses, such fees create an incentive for high-risk investment management. Performance fee rates have fallen since the start of the credit crunch-Warren Buffet

Benefits of Hedge Funds

Positive returns in both rising and falling equity and bond markets. Inclusion of hedge funds in a balanced portfolio reduces overall portfolio risk and volatility and increases returns. Wide choice of hedge fund strategies to meet their investment objectives. Academic research proves hedge funds have higher returns and lower overall risk than traditional investment funds. Hedge funds provide an ideal long-term investment solution, eliminating the need to correctly time entry and exit from markets. Adding hedge funds to an investment portfolio provides diversification not otherwise available in traditional investing.

Hedge Funds- Figures

The world's largest hedge fund manager in 2011, Bridgewater Associates, had $70 billion under management as of 1 March 2012

As of February 2011, 61% of worldwide investment in hedge funds comes from institutional sources

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

Example
Blackstone has built long-term relationships with many of the leading institutional investors around the world Blackstone has more than 1,500 public and corporate pension funds, academic endowments and charitable foundations, sovereign wealth funds and other investors in over 52 countries.
http://www.blackstone.com/limited-partners/about-our-limited-partners

Investors by category by capital raised % of total

Limited partners by geography by capital raised % of total

Some facts about Indian Hedge Funds

India-focused hedge funds ranked among world's top performers The Eurekahedge Indian Hedge Fund Index returned over 5% in the first eight months of 2010 vis--vis 2% gains by benchmark Sensex in the same period. The $15bn FoHF portfolio of London-based hedge fund giant Man Group, for example, is 10-15% exposed to emerging markets and 1% exposed to India. Indian hedge fund industry has grown 30% this year while India focused hedge funds have increased 7% in September alone

Hedge Funds in India

India Capital Fund - Mauritius based Monsoon Capital Equity Value Fund - Mauritius based Karma Capital Management, LLC Atyant Capital Atlantis India Opportunities Fund Launched focussed on Funds boutiqueDeep Value fund services Incorporated fund management Provide areIndia in 2005indian public and private equity Achieve Indea Absolute in the Indian securitiesin market Invested in term gains Return Fund, investing Launchedlong publicly traded Indianstock market India
through deep value investing and Indian companies abroad

Hedge funds Vs Mutual funds

Hedge Funds are like mutual funds in some ways . Investments professionals in a hedge fund pool in money from investors to be managed exactly like the mutual funds do. And subject to some minor restrictions , investors in hedge funds can withdraw their money as they can in mutual fund.

Hedge funds Vs Mutual funds

Hedge Funds Mutual Funds

Focus on absolute returns.

Focus on relative returns.

returns should be higher than benchmark.

Can invest in any assetStocks, bonds, commodities , real estate, etc.. Work within risk controlled and compliance framework set up by regulator, hence very risky asset classes are prohibited for investment. Objective is to protect investors investments hence they go for diversification.

They can run highly concentrated portfolios.

Meant for accredited investors whose net worth is more than 1.5 million dollars. Hedge funds are virtually unregulated.

Meant for people at large, even small investors can participate. Heavily regulated since investor safety is most important requirement. They are sold as products.

They are not marketed publicly.

Strategies Adopted By Hedge Fund

Managed Futures:
Investments depending on the manager's view of the economic or market outlook.

Managers profit from large up and down movements using both long and short positions, resulting in returns similar to that of a straddle.
Straddle is composed of buying a put and call option on the same investment & the gain is directly related to the volatility of the investment. The more investments fluctuates, the higher the return and vice versa.

Event Driven:
Also known as Special Situation or Special Opportunity strategies.
Invest in companies that are expecting a large impact on the price of the stock over a short period of time. Tries to capitalize on the changing prices of stocks caused by events such as corporate restructuring, stock buybacks, bond upgrades, expected earnings surprises, and any other reason a company's stock price may change. E.g. distressed securities A hedge fund would wait for an impending reorganization or bankruptcy of a company.

Risk (Merger) Arbitrage -the hedge fund simultaneously buys a company that is being acquired and sells the short the stock of the acquirer.
The investment philosophy of Fair Value Capital in Indian market is Event Driven.

Dedicated Shorts: Sells securities short in anticipation of being able to re-buy them at a future date at a lower price. Managers asses investment options based on his or her opinion of the overvaluation of securities, the market.

Used as a hedge to offset long-only portfolios and by those who feel the market is approaching a bearish cycle.
The goal is to earn returns by maintaining net short exposure (more dollars short than long) in securities. It is common to see a short bias, and still hold some securities longa hedged position.

Convertible Arbitrage:
An investing strategy that involves the long position on a convertible security and a short position in its converting common stock.

Strategy that involves purchasing a portfolio of convertible securities, generally convertible bonds.

Hedging a portion of the equity risk by selling short the underlying common stock.

When a stock declines, the associated convertible bond will decline less, because it is protected by its value as a fixed-income instrument and it pays interest periodically

Strategies Continued
Global Macro Hedge Fund:

1 2

Attempts to profit from shift in the market due to economic, political & government events Directional Relative value Black Wednesday :Sept 16th 1922 George Soros made a $1 billion profit

Strategies Continued
Equity Market Neutral:
.

1
2

Seeks to exploit differences in stock prices by being long & short in stocks within the same industry ,sector

It acts as a hedge against the market risk

Strategies Continued

Fixed-Income arbitrage:
.

1
2 3

Exploits the inefficiencies in the pricing of bonds Steady returns & low volatility Example : Swap spread arbitrage

Thank You