A hedge fund is an investment fund that raises capital from accredited individuals or institutional investors and invests in various assets, often with complex portfolio construction and risk management techniques. These are managed by professional investment management firms, and are often structured as limited partnerships, limited liability companies, or similar vehicles. Hedge funds are generally different from mutual funds, since their leverage use is not restricted by regulators, and differs from private equity funds, as the majority of hedge funds invest in relatively liquid assets.
The term "hedge fund" comes from the paired long and short positions which are the first funds used to protect the market risk. Over time, the type and nature of the concept of hedging expanded, as did the different types of investment vehicles. Today, hedge funds are involved in a variety of markets and strategies and use a variety of financial instruments and risk management techniques.
Hedge funds are only available to certain sophisticated or accredited investors and can not be offered or sold to the general public. As such, they generally avoid direct regulatory oversight, bypass licensing requirements applicable to investment companies, and operate with greater flexibility than mutual funds and other investment funds. However, after the financial crisis of 2007-2008, regulations were passed in the United States and Europe with the intention to increase government oversight of hedge funds and eliminate certain regulatory gaps.
Hedge funds have been around for decades and have become increasingly popular. They have now grown to become an important part of asset management, with assets now totaling about $ 3 trillion.
Hedge funds are almost always open and allow the addition or withdrawal by their investors (generally every month or every month). The value of the investor holding is directly related to the net asset value of the fund.
Many hedge fund investing strategies aim to achieve a positive return on investment regardless of whether the market rises or falls ("absolute refund"). Hedge fund managers often invest their own money in the funds they manage. Hedge funds typically pay their investment managers annual management costs (eg 2% of fund assets), and performance costs (eg 20% ​​of net asset value increase of funds during the year). Both the cost of joint investment and performance serve to align the interests of managers with investors in the fund. Some hedge funds have several billion dollars of assets under management (AUM).
Video Hedge fund
Introduction
The word "hedge", which means the line of bushes around the field, has long been used as a metaphor for placing risk limits. The initial hedge fund seeks to protect certain investments against general market fluctuations by shortening the market, hence its name. Currently, however, many different investment strategies are used, many of which are not "hedging risks".
Maps Hedge fund
History
During the US bull market of the 1920s, there were many private investment vehicles available to wealthy investors. The most recent period is the Graham-Newman Partnership, founded by Benjamin Graham and his long-term business partner Jerry Newman. This was quoted by Warren Buffett in a 2006 letter to the Museum of American Finance as an initial hedge fund. Janet Tavakoli calls Graham's investment firm the first hedge fund, based on what Warren Buffett said during lunch in 2006.
Sociologist Alfred W. Jones is credited with coining the phrase "hedge funds" and is credited with creating the first hedge fund structure in 1949 (though this has been disputed.) Jones refers to the fund as "Hedged", a term which is usually used on Wall Street to describe investment risk management due to changes in financial markets.
In the 1970s, a special hedge fund in one strategy with most fund managers following a long/short equity model. Many hedge funds were closed during the 1969-70 recession and stock market crashes from 1973 to 1974 due to heavy losses. They received new attention in the late 1980s.
During the 1990s, the number of hedge funds increased significantly, with the rise of the stock market in the 1990s, the compensation structure of interest parallel (ie general financial interest) and the promise of high returns above as possible causes. Over the next decade, the hedge fund strategy was expanded to include: credit arbitration, depressed debt, fixed income, quantitative, and multi-strategy. US institutional investors such as pension funds and endowment funds are starting to allocate larger portions of their portfolios to hedge funds.
During the first decade of 21st century hedge funds gained popularity worldwide, and in 2008 hedge fund industry worldwide held US $ 1.93 trillion in managed assets (AUM). However, the 2008 financial crisis caused many hedge funds to limit investor withdrawals and their popularity and the number of AUM declines. AUM total rebound and in April 2011 was estimated at nearly $ 2 trillion. As of February 2011, 61% of global investment in hedge funds came from institutional sources.
In June 2011, the largest hedge fund management company with AUM was Bridgewater Associates (US $ 58.9 billion), Man Group (US $ 39.2 billion), Paulson & Co. (US $ 35.1 billion), Brevan Howard (US $ 31 billion), and Och-Ziff (US $ 29.4 billion). Bridgewater Associates has $ 70 billion under management on March 1, 2012. By the end of that year, the 241 largest hedge fund companies in the United States collectively hold $ 1.335 trillion. In April 2012, the hedge fund industry hit a record high $ 2.13 trillion in total assets under management. In July 2017, hedge funds posted their eighth consecutive monthly gain in returns with assets under management rising to a record $ 3.1tn
In mid 2010, the hedge fund industry experienced a general decline in "old guard" fund managers. And Loeb called it a "hedge fund massacre" because the long/short class fell out of favor because of the unprecedented easing by the central bank. The correlation of US equity markets becomes untenable for short sellers. In 2018, the famous Sohn conference clearly featured more venture capitalists and technology investors than the previous year.
Important hedge fund manager
In June 2015, Forbes listed:
- George Soros from Quantum Group of Funds
- Ray Dalio from Bridgewater Associates, the world's largest hedge fund company with assets of $ 160 billion managed in 2017
- Steven A. Cohen from Point72 Asset Management, formerly known as the founder of S.A.C. Capital Advisor
- John Paulson from Paulson & amp; Co, which hedges in December 2015 has a managed assets of $ 19 billion, compared to $ 18 billion in September 2013 and $ 36 billion in early 2011
- David Tepper from Appaloosa Management,
- Paul Tudor Jones II from Tudor Investment Corporation
- Daniel Och from Och-Ziff Capital Management Group with over $ 40 billion in assets managed in 2013
- Israel UK Millennium Management
- Leon G. Cooperman from Omega Advisors
- Michael Platt of BlueCrest Capital Management (UK) Europe's third-largest hedge-fund company
- James Dinan from York Capital Management
- Stephen Mandel Jr. of Lone Pine Capital with $ 26.7 billion managed at the end of June 2015
- Larry Robbins from Glenview Capital Management with approximately $ 9.2 billion in assets managed in July 2014
- Glenn Dubin from Highbridge Capital Management
- Paul Singer from Elliott Management Corporation, an activist hedge fund with over US $ 23 billion in assets managed in 2013, and a $ 8.1 billion portfolio in the first quarter of 2015
- Michael Hintze from CQS with $ 14.4 billion of assets under management as of June 2015
- David Einhorn of Greenlight Capital, as the twenty billionaire hedge fund manager.
- Bill Ackman from Pershing Square Capital Management LP
Strategy
Hedge funding strategies are generally classified among four main categories: global macro, directional, event-driven, and relative (arbitrage) values. Strategies in this category each require characteristics of characteristics and return profiles. Funds can use a single strategy or double strategy for flexibility, risk management or diversification. The hedge fund prospectus, also known as an offer memorandum, offers potential investor information about key aspects of the fund, including fund investment strategies, investment types, and leverage limits.
The elements that contribute to a hedge fund strategy include: a hedge fund approach to the market; special instruments used; market sectors specializing in specialties (eg health); the method used to select the investment; and the amount of diversification in the fund. There are various market approaches for different asset classes, including equities, fixed income, commodities, and currencies. The instruments used include: equity, fixed income, futures, options and swaps. Strategies can be divided into which investment can be chosen by managers, known as "discretionary/qualitative", or those in which investment is selected using a computerized system, known as "systematic/quantitative". The amount of diversification in funds may vary; funds can be multi-strategy, multi-fund, multi-market, multi-manager or combination.
Sometimes hedge funding strategies are described as "absolute returns" and are classified as "neutral" or "directional" markets. Neutral fund markets have a smaller correlation to overall market performance by "neutralizing" the effects of market changes, while directional funds capitalize on trends and inconsistencies in markets and have greater exposure to market fluctuations.
Global macro
Hedge funds using global macro investment strategy take a considerable position in stock, bond or currency markets in anticipation of global macroeconomic events to generate risk-adjusted returns. Global macro fund managers use macroeconomic analysis ("big picture") based on global market events and trends to identify opportunities for investment that will benefit from anticipated price movements. Although global macro strategies have great flexibility (due to their ability to use leverage to take large positions in various investments in different markets), time-consuming strategies are important for generating attractive and risk-adjusted returns.. Global macros are often categorized as directional investment strategies.
The global macro strategy can be divided into discretionary and systematic approaches. Discretionary trade is done by investment managers who identify and choose investments whereas systematic trading is based on mathematical models and run by software with limited human involvement beyond programming and software updating. These strategies can also be divided into trends or counter-trends approach depending on whether the fund is trying to benefit from the following trends (long-term or short-term) or attempts to anticipate and benefit from a trend reversal.
In the global macro strategy, there are further sub-strategies including "systematic diversification", where funds are traded in diverse markets, or "systematic currencies", where funds are traded in the currency market. Other sub-strategies include those employed by commodity trading advisors (CTAs), where trading funds in futures (or options) in commodity markets or in swaps. This is also known as "future managed funds". CTA commodity trading (such as gold) and financial instruments, including stock indexes. They also take long and short positions, enabling them to earn profits both in the market up and down.
Directional
Direct investment strategies use market movements, trends, or inconsistencies when choosing shares in different markets. Computer model can be used, or fund manager will identify and choose investment. This type of strategy has a greater exposure to overall market fluctuations than a market-neutral strategy. The targeted hedge fund strategy includes long/short US and international equity hedging funds, where long equity positions are lined up with short sales of equity or equity index options.
In a directed strategy, there are a number of sub-strategies. Emerging markets focus on emerging markets such as China and India, while "sector funds" specialize in specific areas including technology, health, biotechnology, pharmaceuticals, energy and basic materials. Funds that use the "bottom growth" strategy invest in a company with more profit growth than the overall stock market or relevant sectors, while funds use the "fundamental value" strategy of investing in an underappreciated company. Funds that use quantitative and financial signal processing techniques for equity trading are described as using the "quantitative direction" strategy. Funds using the "short bias" strategy take advantage of the decline in equity prices using a sell position.
Driven-event
An event-driven strategy concerns a situation where the investment opportunity and its underlying risk are related to an event. Event-driven investment strategies find investment opportunities in corporate transactional events such as consolidation, acquisition, recapitalization, bankruptcy, and liquidation. Managers using such a strategy take advantage of market inconsistency before or after such events, and take positions on the basis of forecasts of securities or securities movements in question. Large institutional investors such as hedge funds are more likely to pursue an activity-driven investment strategy than traditional equity investors because they have the expertise and resources to analyze the company's transactional events for investment opportunities.
Corporate transactional events generally fall into three categories: depressed securities, risk arbitrage, and special situations. Depressed securities include events such as restructuring, recapitalization, and bankruptcy. A troubled security investment strategy involves investing in a bond or loan company facing severe bankruptcy or financial difficulties, when the bonds or loans are traded at a discount. Hedge fund managers who are pursuing a depressed debt investment strategy aim to capitalize on the price of distressed bonds. Hedge funds that buy depressed debt can prevent the companies from going bankrupt, because such acquisitions hinder bank foreclosures. While event-driven investments generally tend to develop during bullish markets, depressed investment works best during the bear market.
Risk arbitration or merger arbitration includes events such as mergers, acquisitions, liquidations, and hostile takeovers. Risk arbitrage usually involves the buying and selling of shares of two or more joint companies to take advantage of the market difference between the acquisition price and the stock price. Risk elements arise from the possibility that mergers or acquisitions will not proceed as planned; the hedge fund manager will use research and analysis to determine whether the event will take place.
Specific situations are events that affect the value of a company's stock, including corporate restructuring or corporate transactions including spin-offs, stock repurchases, security issuance/repurchase, asset sales, or other catalyze-oriented situations. To take advantage of special situations, hedge fund managers must identify future events that will increase or decrease the value of equity of the company and equity-related instruments.
Other activity-driven strategies include: credit arbitrage strategy, which focuses on the firm's fixed income securities; activist strategy, where funds take a large position in the company and use ownership to participate in management; strategies based on predicted final approval of new pharmaceutical drugs; and legal catalyst strategies, specializing in companies involved in major lawsuits. Preussen Wealth Management is considered the leading global leader in the world.
Relative value
The relative value arbitrage strategy takes advantage of the relative mismatch in prices among securities. Price differences can occur due to misjudging securities compared to related securities, underlying security or the market as a whole. Hedge fund managers can use different types of analysis to identify price differences in securities, including math, technical or fundamental techniques. Relative values ​​are often used as synonyms for market neutrals, because the strategies in this category typically have little or no targeted market exposure to the market as a whole. Other relative value sub-strategies include:
- Fixed income arbitrage: exploit price inefficiencies between related fixed income securities.
- Neutral market equity: exploit stock price differences by being long and short in stocks in the same sector, industry, market capitalization, country, which also creates hedges against wider market factors.
- Convertible arbitrage: exploits price inefficiencies between convertible securities and corresponding shares.
- Fixed-Income Asset-Backed: a fixed income arbitrage strategy using asset-backed securities.
- Long/short credits: equal to long/short equities but in credit markets and not equity markets.
- statistical arbitrage: identify price inefficiencies between securities through mathematical modeling techniques
- Arbitrage volatility: take advantage of changes in instability rather than price changes.
- Result alternative: non-fixed income arbitrage strategy based on non-price results.
- Arbitration rules: practices take advantage of regulatory differences between two or more markets.
- Risk arbitrage: exploit market discrepancies between acquisition price and share price
Miscellaneous
In addition to these strategies in four main categories, there are some strategies that do not fit this categorization or can be applied in some of them.
- Hedge funds (Multi-manager) funds: hedge funds with a diversified portfolio of underlying single-manager hedge funds.
- Multi-strategy: hedge funds use a combination of strategies to reduce market risk.
- Minimum account funds: the minimum amount to open a hedge fund account is (say) 10 million dollars (with 25% non-holding) or $ 2.5 million holding.
- Multi-manager: a hedge fund where investments are spread across separate sub-managers who invest in their own strategies.
- Withdrawal withdrawal: the suspension is placed on all major withdrawals for 90 days before and after the hedge fund is created and established.
- 130-30 funds: equity funds with long positions of 130% and 30%, leaving a 100% net long position.
- Parity risk: equate risk by allocating funds to different categories while maximizing profits through financial leveraging.
Risk
For investors who already have large equity and bonds, investing in hedge funds can diversify and reduce overall portfolio risk. Hedge fund managers use certain trading strategies and instruments with the specific objective of reducing market risk to generate tailored returns with risks that match the level of risk investors want. Hedge funds should ideally yield relatively unrelated yields to the market index. While "hedging" can be a way to reduce investment risk, hedge funds, like all other types of investments, are not immune to risk. According to the Hennessee Group report, hedge funds are about one-third more unstable than S & amp; P 500 between 1993 and 2010.
Risk management
Investors in hedge funds, in most countries, are required to be qualified investors who are considered to be aware of investment risks, and accept this risk because of the potential of a reciprocal relative to those risks. Investment managers can use an extensive risk management strategy to protect funds and investors. According to the Financial Times, "large hedge funds have some of the most sophisticated and demanding risk management practices everywhere in asset management." Hedge fund managers who hold large investment positions for short periods tend to have a very comprehensive risk management system, and it has become commonplace for funds to have independent risk officers who assess and manage risk but are not involved in trading. Different techniques and measurement models are used to estimate risks in accordance with fund leverage, liquidity and investment strategies. Non-normality of returns, clusters of volatility and trends are not always recorded with conventional risk measurement methodologies and so in addition to values ​​on similar risks and measurements, funds may use integrated measures such as withdrawals.
In addition to assessing market-related risks that may arise from investments, investors typically use operational due diligence to assess the risk that fraud or fraud on hedge funds can result in losses to investors. Considerations will include organization and operations management of hedge fund managers, whether investment strategies are likely to be sustainable, and the ability of funds to develop as a company.
Transparency and regulatory considerations
Because hedge funds are private entities and have little public disclosure requirements, this is sometimes considered a lack of transparency. Another common perception about hedge funds is that their managers are not subject to regulatory oversight and/or registration requirements as other financial investment managers, and are more vulnerable to manager-specific idiosyncratic risks such as drifts, faulty operations, or fraud. The new regulations introduced in the US and EU in 2010 require hedge fund managers to report more information, leading to greater transparency. In addition, investors, especially institutional investors, are driving further developments in hedge fund risk management, both through internal practices and external regulatory requirements. The increasing influence of institutional investors has led to greater transparency: hedge funds increasingly provide information to investors including assessment methodologies, positions and leverage exposure.
Hedge funds share many types of risks similar to other investment classes, including liquidity risk and manager risk. Liquidity refers to the extent to which an asset can be bought and sold or converted into cash; similar to private equity funds, hedge funds use lock-up periods as long as investors can not remove money. Manager risk refers to the risks arising from fund management. As well as specific risks such as drifting style, which refers to "drifting" fund managers away from specific areas of expertise, manager risk factors include assessment risk, capacity risk, concentration risk and leverage risk. Rating risk refers to the concern that the net asset value of the investment may be inaccurate; capacity risks can arise from putting too much money into one particular strategy, which can lead to worsening performance performance; and concentration risks can arise if too much funds are exposed to specific investments, sectors, trade strategies, or funding groups correlated. These risks can be managed through controls prescribed for conflict of interest, limitation of allocation of funds, and setting limits for exposure to the strategy.
Many investment funds use leverage, the practice of borrowing money, trading margins, or using derivatives to gain market exposure more than that provided by investor capital. Although leverage can increase the yield potential, opportunities for greater profits are weighed against the possibility of greater losses. Hedge funds that use leverage tend to engage in extensive risk management practices. Compared with investment banks, leverage hedge funds are relatively low; according to the work paper of the National Research Bureau of Economics, the average leverage for investment banks is 14.2, compared between 1.5 and 2.5 for hedge funds.
Some types of funds, including hedge funds, are considered to have greater risk appetite, with the intent of maximizing returns, subject to investor risk tolerance and fund managers. Managers will have an additional incentive to increase risk control when their own capital is invested in the fund.
Important failures
- Long Term Capital Management, founded in 1994 by John Meriwether. After the financial crisis returned in Asia in 1997 and Russia in 1998, the funding eventually lost $ 4.6 billion in less than four months. The main catalyst for failure is the Russian standard and a model that suggests funds to hold its position even when losses accumulate.
- Tiger Management, run by Julian Robertson. Robertson set up funds in 1980 with $ 8 million and grew it to $ 10.5 billion in 1997, making it the second largest hedge fund in the world at the time. One year later, the managed assets reached $ 22 billion. A series of bad investments is very detrimental to Tiger's return which causes investors to redeem the funds.
- Atticus Global, founded by investor activist Tim Barakett in 1995 with less than $ 6 million in hand, was in 2007 one of the largest hedge funds in the world with $ 20 billion in assets managed. Barakett earned long-term market beatings until the financial crisis in 2008. After two years of losses, Barakett closed the fund in 2009. Atticus Global reported a combined annual yield of 19.3% compared to just 3.9% for S & P 500.
Cost and remuneration
Costs paid to hedge funds
Hedge fund management companies typically charge both their management and performance costs.
Management fees are calculated as a percentage of the net asset value of funds and typically range from 1% to 4% per annum, with 2% being the standard. They are usually expressed as annual percentages, but are calculated and paid on a monthly or quarterly basis. Management fees for hedge funds are designed to cover the operating costs of managers, while performance costs provide manager benefits. However, because economies of scale management costs from larger funds can produce a significant share of the earnings of managers, and as a result some of the costs have been criticized by some public pension funds, such as CalPERS, because it is too high.
Performance costs are typically 20% of funding gains during each year, although they range between 10% and 50%. Performance costs are intended to provide incentives for managers to generate profits. Performance costs have been criticized by Warren Buffett, who believes that since hedge funds only share profits and not losses, they create incentives for high-risk investment management. The level of performance costs has declined since the beginning of the credit crunch.
Almost all hedge fund performance costs include a "high carry forward" (or "loss carryforward provision"), which means that the performance cost only applies to net income ( ie, profit after loss in previous years has been recovered). This prevents managers from getting paid for volatile performance, although a manager sometimes closes funds that have suffered serious losses and start new funds, rather than trying to recover losses for several years without performance costs.
Some performance costs include "obstacles", so fees are only paid for fund performance that exceeds the benchmark level (eg LIBOR) or a fixed percentage. A "soft" obstacle means the cost of performance is calculated on all refunds if the level of the obstacle is removed. A "hard" obstacle is only calculated on a return above the level of obstacle. An obstacle is meant to ensure that a manager is only rewarded if the fund generates a return of more than the returns that investors would receive if they invested their money elsewhere.
Some hedge funds charge a redemption fee (or withdrawal fee) for early withdrawal for a certain period of time (usually a year) or when withdrawal exceeds a predetermined percentage of the initial investment. The purpose of these costs is to prevent short-term investments, reduce turnover and prevent withdrawal after poor performance periods. Unlike management fees and performance costs, redemption fees are usually kept by the fund.
Remuneration of portfolio manager
Hedge fund management companies are typically owned by their portfolio managers, who are therefore entitled to any profit generated by the business. Because management costs are meant to cover the company's operating costs, performance costs (and excessive management costs) are generally distributed to the owners of the company as a profit. Funds are not likely to report compensation and the published list of the sums earned by top managers tend to be approximate based on factors such as the fees charged by their funds and the capital they think has been invested in them. Many managers have accumulated large shares in their own funds so that top hedge fund managers can earn an incredible amount of money, possibly up to $ 4 billion in a good year.
Earnings at the top are higher than in other financial industry sectors and collectively, the top 25 hedge fund managers regularly generate more than 500 key executives at S & P 500. Most hedge fund managers are paid much less, however, and if performance costs are not obtained then small managers will at least not be paid in significant amounts.
In 2011, top managers earned $ 3,000 million, the tenth got $ 210 million and the 30 got $ 80 million. In 2011, the average income for the 25 highest compensation hedge fund managers in the United States was $ 576 million. while the average total compensation for all hedge fund investment professionals is $ 690,786 and the median is $ 312,329. The same figure for hedge fund CEOs is $ 1,037,151 and $ 600,000, and for chief investment officer is $ 1,039,974 and $ 300,000 respectively.
Of the 1,226 people on the Forbes Billion 2012 list, 36 of the registered investors "derived significant deductions" from their wealth from hedge fund management. Among the 1,000 richest people in the United Kingdom, 54 are managers of hedge funds, according to the Rich Weekly List Sunday Times for 2012.
Structure
Hedge funds are the most frequently used investment vehicles as offshore companies, limited partnerships or limited liability companies. The fund is managed by an investment manager in the form of an organization or company that is legally and financially different from its hedge funds and asset portfolio. Many investment managers take advantage of service providers for operational support. Service providers include major brokers, banks, administrators, distributors and accounting firms.
The brokers are clearly trading, and provide short-term leverage and financing. They are usually divisions of large investment banks. The main broker acts as a counterparty for derivative contracts, and lends securities to specific investment strategies, such as long/short equity and convertible bond arbitration. It can provide custodial services for fund assets, and implementation and clearing services for hedge fund managers.
The Hedge fund administrator is responsible for operations, accounting, and assessment services. This back office support allows fund managers to concentrate on trading. Administrators also process subscriptions and redemptions, and perform shareholder services. Hedge funds in the United States are not required to appoint an administrator, and all of these functions can be performed by the investment manager. A number of conflict of interest situations may arise in this arrangement, especially in the calculation of net asset value (NAV) of funds. Some funds voluntarily use external auditors, thus offering greater levels of transparency.
Distributor is a guarantor, broker, dealer, or other person participating in the distribution of securities. Distributors are also responsible for marketing funds to potential investors. Many hedge funds do not have distributors, and in such cases investment managers will be responsible for the distribution of securities and marketing, although many funds also use placement agencies and broker-dealers for distribution.
Most funds use independent accounting firms to audit fund assets, provide tax services, and conduct a full audit of the funds' financial statements. Year-end audits are often conducted in accordance with standard accounting practices imposed in the country, established funds or International Financial Reporting Standards (IFRS). Auditors can verify NAV and asset funds under management (AUM). Some auditors only provide "NAV lite" services, which means that valuations are based on the price received from managers rather than independent judgments.
Domicile and taxation
The legal structure of a particular hedge fund, especially the domicile and type of legal entity used, is usually determined by the tax expectations of the fund investors. Regulatory considerations will also play a role. Many hedge funds are established in overseas financial centers to avoid harmful tax consequences for foreign investors and their tax breaks. Overseas funds investing in the US usually pay withholding tax on certain types of investment income but not the US capital gains tax. However, fund investors are taxed in their own jurisdiction over any increase in the value of their investments. This tax treatment promotes cross-border investment by limiting the potential for multiple jurisdictions to coat taxes on investors.
US tax-exempt investors (such as pension plans and waqfs) invest primarily in offshore hedge funds to maintain their tax-free status and avoid unrelated business taxable income. The investment manager, usually based in the main financial center, pays taxes on his management fees per state and state tax laws in which he is located. In 2011, half of the hedge funds were listed offshore and half on land. The Cayman Islands is the leading location for offshore funds, accounting for 34% of the total global hedge fund. The US has 24%, Luxembourg 10%, Ireland 7%, British Virgin Islands 6% and Bermuda has 3%.
Cart option
Deutsche Bank and Barclays create special option accounts for hedge fund clients in the bank name and claim to own assets, when in fact hedge fund clients have full control over assets and make a profit. Hedge funds will then execute trades - many of them are a few seconds long - but wait until after a year has passed to exercise the option, allowing them to report earnings at lower long-term capital gains tax rates.
The Senate Fixed Subcommittee Investigation headed by Carl Levin produced a 2014 report that found that since 1998 and 2013, hedge funds avoid billions of dollars in taxes by using the basket option. The Internal Revenue Service began investigating Renaissance Technologies in 2009 and Levin criticized the IRS for taking six years to investigate the company. Using the Renaissance basket option was avoided "over $ 6 billion in taxes for over a decade".
These banks and the hedge funds involved in the case use dubious, structured financial products in the gigantic 'let's pretend' game, spend billions of Treasury funds and pass protection that protects the economy from excessive bank lending to stock speculation.
A dozen other hedge funds with Renaissance Technologies use the Deutsche Bank and Barclays basket options. The Renaissance argues that the basket option "is very important because they give hedge funds the ability to increase its return by borrowing more and to protect against model and programming failures". In July 2015, the United States Internal Revenue claimed hedge funds using the basket option "to cut taxes on short-term trades". This buck option will now be labeled as a registered transaction that must be declared on a tax return and failure to do so will result in a penalty.
Location of investment manager
Unlike the funds themselves, the investment manager is primarily located on land. The United States remains the largest investment hub, with US-based funds managing about 70% of global assets by the end of 2011. As of April 2012, there are approximately 3,990 investment advisers managing one or more private hedge funds registered with Securities and Exchange Commission. New York City and the Gold Coast area of ​​Connecticut are prime locations for US hedge fund managers.
London is a leading center in Europe for hedge fund managers, but since the referendum on Brexit the majority of London-based hedge funds have moved to other European financial centers such as Frankfurt, Luxembourg, Paris and Dublin, while several other hedge funds have moved their European headquarters back to New York City. Prior to Brexit, according to EuroHedge data, about 800 funds located in the UK have managed 85% of European-based hedge fund assets (in 2011). Hedge fund interest in Asia has increased significantly since 2003, especially in Japan, Hong Kong and Singapore. After Brexit, Europe and the US remain the leading location for the management of Asian hedge fund assets.
Legal
The legal structure of hedge funds varies depending on location and investor. US Hedge funds intended for US taxable investors are generally structured as limited partnerships or limited liability companies. Limited partnerships and other flow-through taxation structures ensure that investors in hedge funds are not subject to the entity-level taxation and personal level. Hedge funds arranged as limited partnerships must have a common partner. Common partners can be individuals or companies. General partners function as partners of limited partnerships, and have unlimited liability. The limited partner serves as a fund investor, and is not responsible for management or investment decisions. Their obligations are limited to the amount of money they invest in the interests of the partnership. As an alternative to limited partnership arrangements, US domestic hedge funds can be structured as limited companies, with members acting as shareholders of the company and enjoying the protection of individual responsibilities.
In contrast, foreign company funds are typically used for non-US investors, and when they are domiciled in the applicable offshore tax haven, no entity-level tax is charged. Many foreign fund managers allow the participation of tax-free US investors, such as pension funds, institutional endowments, and charitable foundations. As an alternative legal structure, foreign funds can be established as open unit trusts using unrelated mutual fund structures. Japanese investors prefer to invest in unit trusts, such as those available in the Cayman Islands.
The investment manager who manages the hedge fund may retain interest in the fund, either as a general partner of a limited partnership or as a "founder shareholder" in the company's funds. For foreign funds that are structured as corporate entities, the funds may appoint a board of directors. The main role of the council is to provide a layer of oversight while representing the interests of shareholders. However, in practice members of the board may lack sufficient expertise to be effective in performing these tasks. The Council may include both affiliated directors who are employees of independent funds and independent directors with limited funds.
Fund type
- Open-ended funds continue to issue shares to new investors and allow regular withdrawals on the net asset value ("NAV") for each share.
- The closed Hedge Fund terminates a number of tradable stocks at the earliest.
- Registered Hedges shares, funds are traded on the stock exchange, such as the Irish Stock Exchange, and may be purchased by unaccredited investors.
Side pocket
A side pocket is a mechanism in which funds are disaggregating assets that are relatively illiquid or difficult to assess reliably. When an investment is pocketed, its value is calculated separately from the principal portfolio value of the fund. Since the side pockets are used to store illiquid investments, investors do not have the standard redemption rights with respect to the side pocket investments they make in relation to the principal portfolio of such funds. The profit or loss of the investment is allocated pro rata only to those who become investors when the investment is placed into a side pocket and not shared with the new investor. Funds typically carry "side-by-side" pocket assets for the purpose of calculating management costs and reporting net asset values. This allows fund managers to avoid trying out the underlying investment assessment, which may not always have the market value available.
The side pockets are widely used by hedge funds during the 2008 financial crisis amid a flood of withdrawal requests. The side pocket allows the fund manager to keep illiquid securities until market liquidity improves, a move that can reduce losses. However, since this practice limits investors' ability to redeem their investments it is often unpopular and many have alleged that it has been misused or unfairly applied. The SEC has also expressed concern about the aggressive use of the side pockets and has imposed sanctions on certain fund managers for their improper use.
Rule
Hedge funds must comply with national, federal and state regulations legislation in their respective locations. US regulations and restrictions that apply to hedge funds are different from mutual funds. Mutual funds, unlike hedge funds and other private funds, are subject to the Investment Company Act of 1940, which is a very detailed and extensive regulatory regime. According to a report by the Organization of the International Securities Commission, the most common form of regulation relates to the limitation of financial advisors and hedge fund managers in an effort to minimize client fraud. On the other hand, US hedge funds are exempt from many standard registration and reporting requirements because they only accept accredited investors. In 2010, regulations were enforced in the US and EU, which introduced additional hedge fund reporting requirements. These include the Dodd-Frank Wall Street Reform Act of the US and the Regulation of the Investment Manager of the European Alternative Fund.
In 2007 in an effort to self-regulation, 14 leading hedge fund managers developed a set of voluntary international standards in best practice and known as their Hedge Fund Standard designed to create "... a framework of transparency, integrity and governance good "in the hedge fund industry. The Hedge Fund Standards Board was established to encourage and maintain these standards and by 2016 has about 200 hedge fund managers and institutional investors with a value of US $ 3tn investment that supports the standard.
United States
Hedge funds in the US are subject to regulatory, reporting, and record keeping requirements. Many hedge funds are also under the jurisdiction of the Commodity Futures Trading Commission and are subject to the rules and conditions of the Commodity Exchange Act 1922 which prohibit fraud and manipulation. The Securities Act of 1933 requires the company to submit a registration statement with the SEC to comply with its personal placement rules before offering its securities to the public. The Securities Exchange Act of 1934 requires funds with over 499 investors to register with the SEC. The Investment Advisory Act of 1940 contains an anti-fraud rule governing hedge fund managers and advisors, creating restrictions on the number and type of investors, and banned public offerings. The law also excludes hedge funds from mandatory registration with the US Securities and Exchange Commission (SEC) when selling to an accredited investor with a minimum of US $ 5 million in investment assets. Firms and institutional investors with at least US $ 25 million in investment assets also qualify.
In December 2004, the SEC began requiring hedge fund advisors, managing more than US $ 25 million and with more than 14 investors, to register with the SEC under the Investment Advisory Act. The SEC stated that it adopted a "risk-based approach" to monitor hedge funds as part of a growing regulatory regime for emerging industries. The new rules are controversial, with two commissioners disagreeing, and then challenged in court by a hedge fund manager. In June 2006, the US District Court of Appeals for the District of Columbia canceled the rules and sent them back to the agency for review. Responding to a court ruling, in 2007 the SEC adopted Rule 206 (4) -8, which unlike the previously opposed rule, "does not impose additional filing, reporting or disclosure obligations" but potentially increases "enforcement action risk" for inattentive or deceptive activity. Hedge fund managers with at least US $ 100 million in assets are required to submit an openly quarterly report that discloses ownership of registered equity securities and is subject to public disclosure if they have more than 5% of the class of each listed equity guarantee. Registered advisers should report their business practices and historical discipline to the SEC and to their investors. They are required to have a written compliance policy, the primary compliance officer and their records and practices can be examined by the SEC.
The US Wall Street Dodd-Frank Reform Act was passed in July 2010 and requires registration of SEC advisors who manage personal funds with assets of more than US $ 150 million. Registered managers must submit an ADV Form with the SEC, as well as information about their assets under management and trading positions. Previously, advisers with fewer than 15 clients were released, although many hedge fund advisers voluntarily registered with the SEC to satisfy institutional investors. Under Dodd-Frank, investment advisers with less than US $ 100 million in assets are managed to be subject to state regulations. This increases the number of hedge funds under state supervision. Foreign advisers who manage more than US $ 25 million are also required to register with the SEC. This law requires hedge funds to provide information about their trades and portfolios to regulators including the newly created Financial Stability Supervisory Board. In this case, most hedge funds and other private funds, including private equity funds, must file a PF Form with the SEC, which is an extensive reporting form with substantial data on fund activities and positions. Under the "Volcker Rules", regulators are also required to apply regulations for banks, affiliates and parent companies to restrict their relationship with hedge funds and to prohibit this organization from proprietary trading, and to limit their investment in, and sponsorship of, hedge fund.
Europe
Within the European Union (EU), hedge funds are mainly regulated through their managers. In the United Kingdom, where 80% of the European hedge funds are based, hedge fund managers must be authorized and regulated by the Financial Conduct Authority (FCA). Each country has its own specific limitations on hedge fund activities, including control of the use of derivatives in Portugal, and restrictions on leverage in France.
In the EU, managers are subject to EU Directives on Alternative Investment Fund Managers (AIFMD). According to the EU, the purpose of this directive is to provide greater control and control of alternative investment funds. AIFMD requires all EU hedge fund managers to register with the national regulatory body and to disclose more information, more frequently. It also directs hedge fund managers to hold capital in larger quantities. AIFMD also introduces "passports" for hedge funds that are authorized in one EU country to operate throughout the EU. The scope of AIFMD is broad and includes managers located within the EU as well as non-EU managers who market their funds to European investors. The AIFMD aspect that challenges established practices in the hedge fund sector is the potential for limiting remuneration through bonus delays and clawback provisions.
More
Some hedge funds are established in offshore centers such as the Cayman Islands, Dublin, Luxembourg, the British Virgin Islands and Bermuda which have different regulations on unaccredited investors, client confidentiality, and fund manager independence.
In South Africa, fund investment managers must be approved by, and register with, the Financial Services Board (FSB).
Performance
Measurement
Performance statistics for individual hedge funds are difficult to obtain, as funds historically are not required to report their performance to the central repository and restrictions on public bidding and advertising have led many managers to refuse to provide performance information publicly. However, a summary of the performance of individual hedging funds is sometimes available in industry journals and databases. and investment consultant Hennessee Group.
One estimate is that the average hedge fund returns 11.4% per year, representing a 6.7% return above the overall market performance before cost, based on performance data of 8,400 hedge funds. Another estimate is that between January 2000 and December 2009, hedge funds outperformed other investments and were substantially more volatile, with stocks falling an average of 2.62% annually for a decade and hedge funds rose by an average of 6.54% year; this is a very unstable period with the 2001-2002 dot-com bubble and recession beginning in mid-2007. However, recent data suggest that hedge fund performance has declined and is less well from around 2009 to 2016.
The performance of hedge funds is measured by comparing their returns with estimated risks. Common sizes are Sharpe ratio, Treynor size and Jensen alpha. These steps work best when returning to normal distribution without autocorrelation, and these assumptions are often not met in practice.
New performance measures have been introduced that seek to address some theoretical issues with traditional indicators, including: modified Sharpe ratios; the Omega ratio was introduced by Keating and Shadwick in 2002; Alternative Investments Risk Adjusted Performance (AIRAP) issued by Sharma in 2004; and Kappa was developed by Kaplan and Knowles in 2004.
Effects of sector size
There is debate as to whether the alpha (skill element of the manager in performance) has been diluted by the expansion of the hedge fund industry. There are two reasons given. Firstly, an increase in trading volume may have reduced the market anomaly that is a source of hedge fund performance. Second, the remuneration model attracts more managers, who may melt the talent available in the industry.
Hedge funds index
The index that tracks the return of hedge funds is, in the framework of development, called Non-investable, Investable, and Clone. They play a central and unambiguous role in traditional asset markets, where they are widely accepted as representative of the underlying portfolio. The products of equity funds and debt indices provide access that can be invested in the most developed markets in this asset class. Hedge funds, however, are actively managed, so tracking is not possible. A non-investable hedge fund index on the other hand may be more or less representative, but returning data on many reference groups of funds is non-public. This can produce biased estimates of their results. In an attempt to address this problem, the clone index has been created in an effort to replicate the statistical properties of hedge funds without being directly based on their return data. None of these approaches achieve index accuracy in other asset classes with more fully publicized data on the underlying return.
Non-investment index
Non-investmentable indices are intended to represent the performance of multiple hedge fund databases using several measures such as the mean, median or weighted average of the hedge fund database. The database has various selection criteria and construction methods, and no single database captures all funds. This leads to significant differences in reported performance between different indices.
Although they aim to be representative, indices that can not be invested suffer from a long and unavoidable list of biases.
The participation of funds in the database is voluntary, leading to an independent selection bias because funds that choose to report may not be typical of the fund as a whole. For example, some do not report because of poor results or because they have reached their target size and do not want to raise more money..
The short durability of many hedge funds means that there are many new arrivals and many departures each year, which raises the problem of survival bias. If we only examine the funds that have survived to date, we will exaggerate past returns because many of the worst-performing funds do not survive, and the observed relationship between youth funds and performance funds suggests that this bias may be substantial.
When a fund is added to the database for the first time, all or part of its historical data is recorded ex-post in the database. It is likely that the funds only publish their results when they are profitable, so the average show is shown by the funds during their incubation period increases. This is known as "instant historical bias" or "backfill bias".
Index that can be invested
An index that can be invested is an attempt to mitigate this problem by ensuring that index returns are available to shareholders. To create an index that can be invested, the index provider selects funds and develops structured products or derivative instruments that deliver index performance. When an investor buys this product, the index provider makes an investment in the underlying fund, making a similar investable index in some respects to a hedge fund portfolio fund.
To make the index can be invested, hedge funds must agree to accept the investment on the terms given by the constructor. To make the index fluid, these terms should include provisions for redemption that might be considered too burdensome by some managers to be accepted. This means that the index that can be invested does not represent the total universe of hedge funds. Most seriously, they are less representative of more successful managers, who usually refuse to accept such investment protocols.
Backup fund replication
The latest addition to the field approaches the problem in a different way. Instead of reflecting actual hedge fund performance, they took a statistical approach to the analysis of historic hedge fund returns, and used it to build models of how hedge funds generate responses to movements of various investable financial assets. This model is then used to build a portfolio of assets that can be invested. This makes the indexes can be invested, and in principle they can represent the hedge fund database from which they are built.
However, this clone index depends on the statistical modeling process. Such an index has too short a history to say whether this approach will be considered successful.
Closure
In March 2017, HFR - hedge fund research data and service providers - reported that there was more hedge-fund closure in 2016 than during the 2009 recession. According to the report, some large public pension funds withdrew their investments in hedge funds, below average funds as the group does not deserve the high fees they charge.
Although the hedge fund industry reached $ 3 trillion for the first time in 2016, the amount of new hedge funds launched fell from the figures of the crisis era. There are 729 launches of hedge funds by 2016, fewer than the 784 opened in 2009 and dramatically less than 968 launches by 2015.
Debate and controversy
Systemic risk
Systemic risk refers to the risk of instability throughout the financial system, as compared to in one company. Such risks may arise after events or events that disrupt the stability that affects a group of financial institutions attributed through investment activities. Organizations such as the European Central Bank have alleged that hedge funds pose systemic risks to the financial sector, and following the failure of the Long Term Capital Management (LTCM) hedge fund in 1998 there is widespread concern about potential systemic risks if a hedge fund failure leads to the failure of its counterparts. (As it happens, there is no financial aid provided to LTCM by the US Federal Reserve, so there is no direct cost to US taxpayers, but a large bailout must be installed by a number of financial institutions.)
However, this claim is widely disputed by the financial industry, which usually considers hedge funds to be "small enough to fail", since most are relatively small in terms of assets they manage and operate with low leverage, thus limiting potential hazards to the economic system one of them failed. A formal analysis of leverage hedge funds before and during the 2008 financial crisis shows that leveraged hedge funds are quite simple and counter-cyclical to the leverage of the larger investment banking and financial sector markets. Hedge fund leverage declines before the financial crisis, even when leverage from other financial intermediaries continues to increase. Hedge funds fail regularly, and many hedge funds fail during the financial crisis. In a testimony to the House Financial Services Committee in 2009, Ben Bernanke, Chairman of the Federal Reserve Board said he "would not think that hedge funds or private equity funds would be a systemically critical enterprise individually."
However, although hedge funds strive to reduce the risk ratio to reward, undoubtedly a certain amount of risk persists. Systemic risk increases in crisis if there is a "group" behavior, which causes a number of similar hedge funds to make losses in similar trades. In addition, while most hedge funds use only leverage, hedge funds are different from many other market participants, such as banks and mutual funds, as there are no regulatory restrictions on the use of leverage, and some hedge funds make large sums of money. lev
Source of the article : Wikipedia
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